Hazik Mohamed, Hassnian Ali - Blockchain, Fintech, and Islamic Finance. Building The Future in The New Islamic Digital Economy (2019, de Gruyter)

Hazik Mohamed and Hassnian Ali
Blockchain, Fintech, and Islamic Finance

Hazik Mohamed and
Hassnian Ali
Blockchain, Fintech,
and Islamic Finance
Building the Future in the

New Islamic Digital Economy
ISBN 978-1-5474-1712-4
e-ISBN (PDF) 978-1-5474-0096-6
e-ISBN (EPUB) 978-1-5474-0098-0
Library of Congress Control Number: 2018962039
Bibliographic information published by the Deutsche Nationalbibliothek

The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie;
detailed bibliographic data are available on the Internet at http://dnb.dnb.de.
© 2019 Hazik Mohamed and Hassnian Ali

Published by Walter de Gruyter Inc., Boston/Berlin
Printing and binding: CPI books GmbH, Leck
Typesetting: MacPS, LLC, Carmel
www.degruyter.com
Advance Praise for Blockchain, Fintech, and
Islamic Finance
The authors are to be congratulated for this book. It is an important pio-
neering effort. The work is on the frontier of knowledge in the new area of
Fintech. As is well known, the financial sector is suffering from low levels
of trust in a trust-intensive industry. Islamic finance too is facing a low-trust
environment that has denied it the use of the strongest of its characteristics:
risk-sharing. As a result, it has resorted to debt-based financing. Blockchain/
smart contracts provide potentially powerful tools to address the low-trust
challenge. The authors have done a great service to Islamic and conventional
finance by producing a book that should be read by anyone interested in
finance and economics.
̶̶Prof. Dr. Abbas Mirakhor, Holder of the First Chair of Islamic Finance at
INCEIF; retired Dean of the Executive Board of the International Monetary
Fund (IMF), Washington D.C.
This is an important contribution by the authors to two emerging fields—

Islamic finance and FinTech. In this respect, it touches two frontiers as this
research could pave the way for the development of both fields. FinTech
offers great potential for reaping the benefits of Islamic finance and this
book provides an excellent overview of the issues and applications. I am
confident that researchers, policy-makers, and practitioners would benefit
from this important work.
̶̶Dr. Zamir Iqbal, VP Finance and Chief Financial Officer (CFO) of Islamic
Development Bank (IsDB), Jeddah; former Head of World Bank Global
Islamic Finance Development Center, Istanbul.
In this digital era, new technology has proven to bring agility, scalability,
innovation, and efficiency in operations and means of doing our work. This
book argues, persuasively, that the Fintech and Blockchain applications are
not only the channels of fusing technology with Islamic finance; it also lays
the foundation for new Islamic digital economy, while keeping in view the
Maqasid Al-Shariah. This book is a first-of-its-kind contribution to the litera-
ture on constructing the Islamic digital economy.
̶̶Dr. Hussain Mohi-ud-Din Qadri, Patron, International Centre of
Research in Islamic Economics (ICRIE) Minhaj University, Lahore.
DOI 10.1515/9781547400966-202
vi Advance Praise for Blockchain, Fintech, and Islamic Finance
While the growth of fintech firms has already become a game changer in the
conventional financial sector, its application in Islamic economy is still in
an incipient stage. The authors of this pioneering work deserve appreciation
to not only offer a historical perspective on these exciting developments but
also suggest ways to building Islamic digital economy with the use of these
tools, especially distributed ledger technology. I would recommend this book
to all those who are interested in building a trusted, just and efficient Islamic
digital economy.
̶̶Zahid ur Rehman Khokher, Assistant Secretary General of the Islamic
Financial Services Board (IFSB), Kuala Lumpur.
The authors hit the mark; blockchain needs to become part and parcel of
economics, finance and policy across Muslim-majority countries. It is crit-
ical for the leadership to understand what blockchain is and its potential
application. Islamic economies need to carefully consider the adoption and
the potential institutionalization of blockchain across various facets of their
economics. The authors lay the groundwork in this book, and it is a must-
read for the broad audience whose desire is to focus on a next generation
technology, its adoption and implications.
̶̶Omar Rana, Director of Strategy and Finance at Finalytix, Toronto, and
former Chief Investment Officer for a US$500M private family
office in the GCC.
Dr Hazik Mohamed:
I dedicate this book to my daughters, Aliya and Nadrahuda. And to all their
cousins, young and old—Syazwan Hanif, Mohamed Hasif, Abdul Hadi, Haris,
Abdul Rahman and Abdul Rahim.
This book contains the shifting trends of the world that you’re growing up
in. Prepare your contributions for the world to come … and the Hereafter that
awaits.
Hassnian Ali:
First, to the most devoted and conscientious person in my life, no one else,
my late father Ghulam Hussain.
About De|G PRESS
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DOI 10.1515/9781547400966-204
Acknowledgments
All praises to Allah, the All-Compassionate, the Most Merciful, without Whom
nothing is possible. Blessings upon our beloved prophet Muhammad and
upon his family and companions.
We acknowledge the advice and recommendation extended by Professor
Abbas Mirakhor and Nick Wallwork in regards to the manuscript.
We also want to express our appreciation to Jeffrey Pepper and his team
for their responsive actions in making this book a reality within the seemingly
impossible schedule that we had proposed.
Hassnian would like to express his profound gratitude to his mother,
Muniran Bibi, and his late father. Their forbearance, guidance and support has
been exceptional, and he would not be who he is today without them. Hassnian
also acknowledges his dear sister, Rakhshinda Parveen, his elder brother, Arfan
Ali, and especially his twin brother, Muhammad Saqlain, who understands and
encourages him to achieve great things.
Dr Hazik recognizes his family for being the heart of inspirational support,
especially his wife, Anisa Hassan; his siblings, their spouses and his in-laws for
their generosity and prayers; and his beloved parents (deceased) who laid the
foundation of belief, endeavor, fairness and justice.
DOI 10.1515/9781547400966-205
Foreword
If you have yet to delve into the world of blockchain and fintech and how they
are connected to Islamic finance recently, this book is the most comprehensive
and practical book ever written on the topic. It looks deep inside the working
protocols of both blockchain and fintech. Interestingly, this book covers all the
relevant and interconnected topics, making it a must-read book on the subject of
blockchain and fintech.
When I was asked to write a few words reflecting on my thoughts about this
book that was sent to me, I immediately felt the vibrancy of this book, even by
merely looking at the table of contents. The content coverage and selected issues
and sub-topics reflect well the intensity of the authors’ knowledge and exposure,
as well as their intuition. As everyone has been looking for a master key for this
most timely knowledge, I am confident this book will prove to be useful and timely.
It may surprise you to know that this book’s algorithm fits perfectly well with
the issues presented in it. This makes this book special, as everything and any-
thing mentioned in this book is essentially framed by cutting-edge knowledge
of blockchain, fintech and, to a considerable extent, the digital economy. This is
not an easy task to accomplish, unless the authors are exceptionally articulate
in explaining these concepts. They have proven themselves to be masters in this
field of knowledge and practice.
This book is equally informative with regard to Islamic finance, covering
aspects of the Islamic capital markets, Islamic investment, retail banking, takaful,
trade financing and sukuk. I would like to believe that this is the most striking
contribution of this book toward the further development of Islamic finance via
smart technology. It appears to me that Islamic finance has no other option but to
embrace this up-and-coming way of doing banking, insurance, investment and
fundraising. If Islamic finance does not choose to be agile and scalable, as well as
innovative, Islamic finance is obviously destined to face constraints and obsoles-
cence, due to stiff competition on many fronts. As the saying goes, life is not the
art of avoiding, but is the art of adapting and improving.
The era of digitalization and platform has finally arrived. Nevertheless, this
brings less benefits and credence to Islamic finance if Islamic finance refuses to
embark on further refinement, enhancement and perfection via blockchain and
fintech. This is one of many insights that the authors of this book are trying to
impress upon the readers. You will find all these aspects of this books both chal-
lenging and yet promising.
How will your knowledge be transformed after reading this book? I have
taken the liberty to pose this question in your early journey embarked upon
with this book. I have a gut feeling that any reader—of course with an inquisitive
DOI 10.1515/9781547400966-206
xiv Foreword
mind—will unlock not only the real potential of Islamic finance in the fourth
Industrial Revolution era, but also, more importantly, discover the logic and
power of smart technology to accomplish more things smarter, quicker and safer
than an average man is capable of, given the same time allocation and complex-
ity of the tasks at hand.
For all intents and purposes, we can’t compete with technology, more so
smart technology. We have to come to terms to these new technologies. It is rea-
sonable and logical for humankind to embrace these developments and use all
sorts of technologies to increase production and efficiency. At some point in time,
we need to believe in technology as the savior for some of the complex, compel-
ling problems and crises faced by humanity, even in the space of human sciences.
In all honesty, I could be a bit biased in my future outlook about smart tech-
nology, and that includes blockchain, fintech and artificial intelligence—given
the fact that I am also a hardcore practitioner of smart technology in some of my
initiatives—but of course, I did not conjure up this sentiment out of thin air. The
world has long been moving toward perfection and precision—at least in some
areas of life. Any and every evolution in this world started from humble begin-
nings but it will strike hard when it is the right time. The only problem is that
we don’t know when is the best time for everything. A quote from Martin Luther
King may shed some hope. He once said, “There is always the right time to do
what is right.”
Obviously, I am not in a position to say for sure when is the right time for this
new and smart technology. However, I am confident that this book has emerged
at the right time for the readers to be enlightened with comprehensive, trendy and
impactful insights about almost everything that is connected with the themes of
blockchain, fintech, digital economy and Islamic finance.
Finally, I am extremely pleased and delighted to introduce this book to you
and I hope you will enjoy reading it as I did.
̶ Datuk Dr. Mohd Daud Bakar,
Chairman of the Shariah Advisory Council at the Central Bank of Malaysia
and the Securities Commission of Malaysia
Contents
Chapter 1: Introduction  1
The Rationale for Financial Disruption  1
Ethics and Technology  2
Digital Transformation and Development  4
Shifts in Customer Behavior  6
Changes in Engagement and Purchasing Behaviors  8
Structure of the Book  8
Chapter 2: Fintech—Definition, History, and Global Landscape  13

Introduction  13
Definition and Concept of Fintech  13
Evolution of Fintech  15
Fintech 1.0 (1866–1987)  17
Fintech 2.0 (1987–2008)  18
Fintech 3.0/3.5  21
Global Landscape of Fintech  22
Fintech Investment  23
Fintech in Major Regions  24
Cryptocurrencies and Initial Coin Offerings  28
Cryptoexchanges  35
e-Wallets  37
Fiqh View on Coins and Tokens  40
Progressive Importance of CyberSecurity  43
Chapter 3: Importance of Fintech and Its Applications  49

Introduction  49
Financial Innovation within the Financial Services Industry
Perspective  50
Payments Industry  50
Crowdfunding and P2P Lending  52
Neo-Banking  54
Asset under Management  55
InsurTech  56
Fintech within the Technological Perspective  57
Blockchain and Its Applications  57
Cloud Computing  58
Big Data Analysis  59
Internet of Things  60
xvi Contents
Robo-Advisors  62
Artificial Intelligence  63
Machine Learning and Deep Learning  64
Chapter 4: Emergence of Islamic Fintech and its Developments  69

Introduction  69
What Is Islamic Fintech?  70
Alignment between Islamic Finance and Fintech  70
Islam and Fintech in History  72
Islamic Fintech Developments Around the Globe  74
Islamic Fintech  75
Islamic Fintech Alliance  88
World’s First Islamic Endowment Crowdfunding Platform  89
Islamic Countries’ Initiatives for Islamic Fintech  90
Islamic Republic of Pakistan (Islamabad, Lahore)  91
Kingdom of Bahrain (Manama)  93
Kingdom of Saudi Arabia (Jeddah, Riyadh)  94
Malaysia (Kuala Lumpur)  95
Republic of Indonesia (Bandung, Jakarta, Surabaya, Yogyakarta)  99
Republic of Turkey (Istanbul)  101
Sultanate of Brunei (Brunei Darussalam)  102
United Arab Emirates (Dubai)  103
United Kingdom (London)  104
Impediments for Islamic Fintech  106
Chapter 5: Blockchain and the Digital Economy  111

Introduction  111
Investments in Blockchain  113
Trends of the Sharing Economy and the Internet of Things Era  114
Trust in the New Sharing Economy  120
Trust and Reciprocity in the Economy  121
Trust and Trustworthiness (Reciprocity) in Islam  123
What Is Blockchain?  123
Blockchains as Databases and Public Registries  128
Blockchain as Smart Contracts  129
Blockchain as Clearing and Settlement of Securities
Transactions  130
Blockchain Infrastructure  133
Storage  134
Processing  135
Communications  137
Contents xvii
Chapter 6: Expanded Use Cases of Blockchain  139

Smart Contracts in Islamic Transactions  139
How Does a Smart Contract Work?  139
Automation and Enforceability  142
Benefits and Evolution of Blockchain-Based Smart Contracts  142
Applications of Smart Contracts  143
Islamic Trade Financing  144
Blockchain-Based Trade Finance  145
Enablers to Blockchain-Based Trade Financing  147
Current Challenges  148
Takaful (Islamic Insurance) on the Blocks  149
A Model for a Blockchain-Based Takaful  151
Blockchain-Based Islamic Capital Markets  154
Payments and Settlements  156
Sukuk on the Blockchain  158
Distributed Ledger Technology and the Over-the-Counter
Market  160
Media Rights, Intellectual Property, and Trademark Protection  160
Generating Advertising Revenues  162
Collections and Copyright Tracking  163
LegalTech and the Evolution of Legal Services  164
Legal Research  165
Contract Management  165
Intellectual Property Management  165
Automation and Analytics  165
eDiscovery  166
Chapter 7: Evolution of Blockchain  169

Transnational Justice Applications for the Economy  170
Coordination and Efficiency in Markets through Consensus-
Building  171
Pragmatic Approach to Blockchain Implementation  172
Overcoming Limitations of Blockchain  176
Technical Challenges  176
Business Challenges  177
Government Regulatory Challenges  178
Privacy Challenges  179
xviii Contents
Chapter 8: Response of Islamic Financial Institutions  181

Important Success Factors in this Era of Digitization  181
Better Customer Experience with Customer Centricity  181
Agility and Scalability  182
Building the Ecosystem  183
Cybersecurity Management  184
Challenges for Islamic Financial institutions  185
Regulatory Issues  185
Comfort Zones and Stagnation in Management  186
Lack of Talent  187
Collaboration Models for Islamic Financial Institutions  189
Islamic Fintech is Opportunity for Islamic Financial Institutions  191
Collaboration is Better than Competition  192
Open Platforms  193
Conclusion  195
Index  201
Preface
The demand for fintech solutions is underscored by the rapid adoption of tech-
nology, high-levels of mobile usage and rising rates of internet penetration, an
increasingly urban, literate and young population, as well as a segment of con-
sumers and micro, small and medium-sized enterprises (MSMEs) underserved
by traditional banking solutions. These factors and the economic potential of
ASEAN have also attracted large numbers of investors to the sector.
To realize the potential benefits fintech innovation can bring will require
commitment and collaboration. Banks, industry leaders, fintech companies and
regulators should continue to collaborate to create an ecosystem to drive greater
access to financial services in the Islamic economy. Building the Islamic fintech
ecosystem is complicated and it involves various market participants and stake-
holders coming together and working toward shared goals of a unified Islamic
economic community, increased financial inclusion for the unbanked and the
seamless cross-border flow of goods, services and payments.
The Islamic world is ripe for technology transformation across sectors such
as e-commerce, travel and hospitality, and, of course, financial services. Technol-
ogy unicorns Lazada, Go-Jek, SEA (formerly Garena) and Grab are just the begin-
ning of a bigger push of tech companies enabling connectivity, consumption and
economic growth. Where 2010 saw the rise of Chinese tech giants and 2015 the
re-awakening of the Indian subcontinent, the next five years will be marked by
the tremendous opportunities in ASEAN.1 It was imperative that this book covered
the developments of fintech in every region of the world, beyond the traditional
markets of North America and Western Europe.
When this project was conceived, there were rapid developments in the Initial
Coin Offering (ICO) world due to the rapid rise of bitcoin value, which drove up
the prices for other cryptocurrencies as well. Suddenly the attention shifted to
the ease of raising capital via a decentralized platform where regulations were
non-existent. During this time, there were many ICO projects that were launched
and were able to raise large amounts of money within a short period of time.
Financial opportunists saw this as a great new way of raising capital for busi-
nesses at an early stage (or even at the idea stage) while others saw it as highly
risky, being in unchartered territory and unregulated by financial regulators. The
problem for regulators was multi-fold and one clear issue was its categorization.
The tokens issued at ICOs were used differently and due to their nature, would
1 https://www.forbes.com/sites/outofasia/2017/08/22/the-5-driving-factors-behind-aseans-im-
minent-FinTech-boom/#301d2b845cf3
DOI 10.1515/ 9781547400966-208

xx Preface
be needed to be categorized differently. This is also the view from the Shariah
perspective.
As this contentious area continues to generate deeper discussions and attract
more attention, the greater opportunities actually lie in the applications of the
underlying technology. These opportunities involve the construction of a new
digital ecosystem and innovation ecology that is able to disrupt and shift all exist-
ing ways of doing commerce, right down to its administration and governance.
The applicability of such technologies is now only limited by our imagination,
having been transformed by the start-up ecosystems sprouting all over the world
and investment capital that chase them. No longer are “unicorn” companies
built in certain “Valleys” or the limited geographies of traditionally tech-leading
nations; they are now being built, and launched from non-traditional countries
like Estonia, Kenya and Indonesia.
Islamic finance and its digital economy offer opportunities for Muslims
and non-Muslims as both populations now seek a convergent solution to their
pressing issues—rebuilding trust and confidence in a financial system that had
lost them. Some technologists imagine this world without intermediaries, while
others just want a faster and more efficient way of transacting. Either way, the
challenge comes from accountability, and embedding that sense of accountabil-
ity within the new systems that are being built, based on the sharing of risks and
profits that anchor the nature of our economies, including the sharing economy
of underutilized assets.
The history of Muslim innovation dates back to the Golden Age when the
Muslim world produced great thinkers who shaped the way we looked at the
world, and in particular mathematics. The first mathematical step from the
Greek conception of a static universe was made by Al-Khwarizmi (780–850), the
founder of modern Algebra. Al-Khwarizmi wanted to go from the specific prob-
lems considered by the Indians and Chinese to a more general way of analyzing
problems, and in doing so he created an abstract mathematical language which
is used across the world today. He enhanced the purely arithmethical charac-
ter of numbers as finite magnitudes by demonstrating their possibilities as ele-
ments of infinite manipulations and investigations of properties and relations.
Al-Khwarizmi is also credited for the development of the lattice (or sieve) multi-
plication method of multiplying large numbers, which was later introduced into
Europe by Fibonacci. Al-Khwarizmi carefully laid down analytical solutions of
the various forms of the quadratic equation and illustrated his method of solution
by practical examples—being the basis of what algorithms do in problem-solving.
Since algorithms make up many computational as well as AI solutions today, it is
apt to recognize these important contributions by him.
Preface xxi
Since there are rotten apples and black sheep even in the virtual world, cyber-
security has become an important component in protecting digital rights and
associated digital assets. This will be an important area of development which is
constantly evolving because of the creativity of hackers and cyber-criminals. That
challenge has been prevalent for the police in the physical world, and it contin-
ues to be a challenge in the virtual world.
One of the key takeaways from this book is that it helps the reader craft a
strategy to embrace digital disruptions so that any agency, corporation, orga-
nization or entity can respond to them in ways that benefit their stakeholders
and people whom they serve. Our sincerest hope is for the readers, especially the
youth and industry leaders, to be able to use our work as a companion to their
digital journey, in traversing the imperceptible terrain of the unknown and pro-
viding sound arguments against change inertia and legacy systems stagnation.
Chapter 1
Introduction
The Rationale for Financial Disruption
The global financial and economic crisis has done a lot of harm to public trust and
confidence in governing and financial institutions, as well as the principles and
the concept itself of the market economy. It has also eroded a lot of public trust in
corporations. The climate of global financial uneasiness can partly be attributed
to the global meltdown of 2008 where governments and other regulatory agents
failed in their responsibility to monitor and steer unrestrained speculative and
damaging financial activities. Outside of the instrumental complexities of collat-
erized debt obligations and credit default swaps, the repeal of the Glass-Steagall
Act,1 or macroanalysis of global imbalances (in levels of savings and investment),
prominent voices have echoed in unison on the erosion of trust and confidence
in the global financial system. The main theme of financial reform in the after-
math of 2008 was basically to encourage greater responsibility after (ex post) and
accountability for risks taken prior (ex ante), in the form of not bailing out the
bankruptcies, and limiting the increasing complexity of financial instruments,
transparency, and answerability for derivative trading to prevent investment
managers from making enormous bets with other peoples’ money, among other
improvements.
In response to the deteriorating fiscal and banking conditions in some
countries, and increased financial fragmentation, major governments like the
European Union (EU) and the United States had supplied liquidity at very long
maturity and at low rates to counter the impending risks for their banks. As the
monetary policies struggled to deliver their intended outcomes, credit and eco-
nomic growth were falling, leading to rising unemployment and reduced con-
sumption and investment. The public grew more restless, with increased resent-
ment and decreased confidence in the ability of their governments to tackle the
depressed markets.
This frustration worsened with the bailouts of “too big to fail” entities, and
have resulted in very smart individuals creating ways to invent their own trust
1 The Glass-Steagall Act of 1933 was enacted in response to the stock market crash of 1929. This
bill was repealed in 1999 by the Gramm-Leach-Bliley Act during the Clinton administration be-
cause it was seen as being too restrictive for local banks and businesses to compete with foreign
banks.
DOI 10.1515/9781547400966-001
2 Chapter 1: Introduction
mechanisms through technology. If you look at bitcoin, for example, its block-
chain technology was born out of the need to keep people honest in the absence
of a central authority and designed to be public and allow anyone to partici-
pate. The design sacrificed efficiency in order to ensure that theft would not pay
because rewriting the ledger would require so much computational power. Sub-
sequently, with verifications coming in from various nodes all over the world, a
system like the blockchain has developed a mechanism of trust where two people
who have not met and do not know each other are able to make a transaction
through a technology that has done the checks and instilled a level of trust that
is required in such transactions, by eliminating fraud and margins for fraudu-
lent activities. This is one of the major reasons that disruptions, especially in the
financial industry, are occurring and at a massive scale. Creating a system that is
harder to tamper with and easier to audit will lead to great benefits in an indus-
try that is being increasingly regulated by central authorities. Beyond such ratio-
nale, other additional benefits lie in operational advantages like cost reductions,
improved efficiencies, transparency, and productivity.
Ethics and Technology
Two fundamental concepts in the Islamic worldview that would have significant
implications on economic (including financial) behaviors are the concept of man
as khalifah (vicegerent) and ‘abd (servant/slave). The Qurán (Surah al-Baqarah,
Qur’an 2:302) mentions that the human being has been created to be a khalifah, a
vicegerent on earth to establish God’s commandments,3 a unique position (with
a mission) not granted to other creations. To be a khalifah, the human being is
endowed with a delegation of authority from God to fulfill “consciously” (not by
force) the divine patterns on earth. He is granted free will to either implement or
annihilate these divine patterns through his actions. He is the only being that can
act contrary to his nature (i.e., not fulfilling God’s primordial command), while no
other creations be it animals, plants, or angels can do so. Human beings are free
to use the bounties and blessings conferred upon them (taskhir), but at the same
2 “And [mention, O Muhammad], when your Lord said to the angels, ‘Indeed, I will make upon
the earth a successive authority.’ They said, ‘Will You place upon it one who causes corruption
therein and sheds blood, while we declare Your praise and sanctify You?’ Allah said, ‘Indeed, I
know that which you do not know.’”
3 Allah’s s.w.t. commandments include establishing justice, fairness, equality, and to fight cor-
ruption, evil, and fraud.
Ethics and Technology 3
time, they must carry out their duty toward God mainly as an ‘abd (who serve and
worship Him) and khalifah (who holds amanah as God’s representative on the
earth) to isti’mar, that is, to prosper the earth and to create a moral social order
on earth. All man’s actions, including his economic activities, should be viewed
in this complete commitment to God by obeying the prescribed framework.
Another example that shapes the relationship of the ethical concepts that
make up the ethical foundation of Islam is the belief of the connection of dunya
(the present world) and akhirah (the hereafter). Muslims are advised to be very
conscious of this correlation in every action they take and choices they make.
When all economic goals are only directed to the happiness of human beings
in this world, institutions are likely to suffer from immoral sentiments that are
opposed to upholding divine laws meant to benefit human beings. In conven-
tional economics, a rational individual is free to maximize his utility as much as
possible without any moral, social, or religious commitment. Consideration for
a “hereafter” reward and punishment of the consequences of economic choices
and decisions made are not included in such a theory. Instead, an Islamic or more
enlightened or universal concept of justice and responsible viceregency would
constrain an individual maximization of utility in view of the greater good.
The presence of al-jannah (Heaven) and al-jahannam (Hell) provides “the
form of the moral conscience” whenever a man chooses to do anything in this
world. It is the very source of moral values. Man, as long as he lives as a member
of the Muslim community, is morally required to always make choices that are
connected with good and to avoid those that are connected with harm. In fact,
these universal principles also apply to all other religions and value systems.
However, behavioral economics informs us that our choices are also governed
by our emotions as well as situational factors and the environment. Even with
deep moral precepts, our actions are highly influenced by our moods, feelings,
and peer pressure, which may be irrational to moral decision making. As such,
if the prescribed behaviors of the Economic Man can be mechanized in a system
that uses technology to overcome our irrationality, those behaviors that harm the
integrity of the financial system in the long run can be prevented. Technological
advancement may have the ability to limit4 poor decisions and detect and prevent
fraud and deception early before a collapse in trust and confidence occurs again.
4 While we encourage the limits to bad decisions, it does not equate to limiting choices. There
is a difference in removing opportunities for fraudulent activities and leaving room for possible
productive ones like innovation.
Digital Transformation and Development
The computing power of digital systems is becoming stronger, faster, and cheaper
at an exponential rate and it is in line with one of the most famous laws, Moore’s
Law,5 that predicted it. Digital Islamic revolution, digitalization, and digital trans-
formation have become the most frequently used words in this last decade, but
especially in the last few years. This term of digital transformation has no uni-
versal definition due to its diversity and it encompasses many dimensions like
digital supply chain, digitalization of services and products, and so on. There
is a plethora of definitions of this term, used to describe the offline-to-online
migration of commercial operations and businesses, including those found in
many published research works. Solis, Li, and Szymanski (2014, p. 7) defined this
term in a concise way in these words: “the realignment of, or new investment
in, advanced technology and business models to more effectively engage digital
customers at every touchpoint in the customer experience lifecycle.” There are
also different terms used in different countries with the same concept like “smart
industry” and “industrial value chain initiative” in Japan, “industrial internet” in
North America and “Industrie 4.0” in Germany and so on (Matzner et al., 2018,
pp. 3–21).
What started as a digital transformation has not been restricted or limited
to a specific industry but has spread to a number of industries, seeking similar
improvements and benefits. This has influence and clout in each and every indus-
try like the health care industry (Belliger & Krieger, 2018), manufacturing industry
(Liere-Netheler, Packmohr, & Vogelsang, 2018; Rüßmann et al., 2015), engineer-
ing, construction, and architecture industries (Boland Jr., Lyytinen, & Yoo, 2007)
and at the top of the list, the banking and financial industry (Kenser, 2018).
The agenda of digitalization has not only received considerable attention
from different industries and businesses, but governments and regulatory
authorities have also had to keep up with the disruption and changed business
environment and markets. They have begun to give importance to and keep
abreast with the new era of digitalization in order to be able to remain relevant
in their fiduciary and “watchdog” duties. The most recent and latest example
of this is the newly formed German government, which emphasized it in their
list of most dedicated items (Liere-Netheler et al., 2018). Unsurprisingly, other
governments are following suit as studies have shown that the use and adoption
5 Moore’s Law is named after Intel cofounder Gordon Moore. He observed in 1965 that tran-
sistors were shrinking so fast that every year twice as many could fit onto a chip while its costs
halved. In 1975 the pace adjusted to a doubling every two years.
Digital Transformation and Development 5
of information communication technologies (ICTs) by the large number of popu-

lation has a very positive relationship with the gross domestic product (GDP) of
the respective countries (Mićić, 2017).6
Digital transformation is imperative for the financial services industry to
remain competitive and achieve longevity in the market. The survival of finan-
cial institutions is connected with the adoption of innovation, and in embracing
digital transformation, to radically improve efficiency and performance within
the organization (Scardovi, 2017). Digital transformation and new technol-
ogy adoption have changed the way of doing business and channels that offer
banking and financial products and services are more intuitive and trustworthy.
These new ways may be very different from the past and have resulted in reshap-
ing the existing models of businesses and the creation of new innovative ones.
In doing so, the transformations have created new industry and market leaders.
According to Forbes (2018) ranking of the top 100 brands, the top five brands
are from the area of technology. These five top brands are valued at US$585.5
billion. Table 1.1 provides the Forbes ranking and growth of these five giants.
Table 1.1: Forbes Ranking (2018), Top 100 Brands
Rank Brand Brand Value (US$B) 1-Year Change
1 Apple $182.80 +8%

2 Google $132.10 +30%
3 Microsoft $104.90 +21%
4 Facebook $94.80 +29%
5 Amazon $70.90 +31%
In a wider trend, the anecdotal evidence shows that the technological conglom-
erates have been surpassing other industries from the last decade and also in
Forbes rankings in terms of number of brands and value. The most recent report
also shows that the number of technology brands (20%) and their value (US$872.6
billion, 40%) are much greater than other industries (see Figure 1.1). The value of
the financial services industry is only US$160.2 billion with thirteen brands. This
difference of number and value of brands in the tech and financial industries is
due to the difference in strategy toward innovation and digitalization.
6 Mićić (2017) cites different empirical and nonempirical studies that explain the link between
digitalization, ICTs, and the national GDP. This study is based on evidence from European coun-
tries and concludes that digital transformation has positive impact on the GDP of these countries
in terms of growth in productivity, and employment.
Retail,
No. of Brands
$119.00 Value US$B
Consumer
Retail, Goods,
9 $124.70
Technology,
20
Consumer Automotive,
Goods, 11 $222.90
Technology,
Automotive, Finance, Finance, $872.60
12 13 $160.20
Figure 1.1: Forbes (2018) 100 Most Valuable Brands List
It was inevitable that technology would meet finance and spawn fintech. The use
of technologies like algorithmic machine learning, collecting massive amounts
of data and interpreting them for decision-making or “crystal-ball” predictions
(predictive analytics), and distributed ledgers (blockchain) in financial industry
will give rise to innovative business models with increased levels of efficiency,
productivity, cost-effectiveness while also improving on customer-centricity. The
most important thing and also a great challenge for both fintech platforms and
financial institutions is to adopt and implement a very pertinent, practical, and
transparent strategy for digital transformation within the organization as well as
in external engagements. This is not only essential to harness the opportunities
afforded by such advancements in technologies, but it communicates the vision
of the organization moving forward into the new digital economy.
Shifts in Customer Behavior
A customers’ journey is the way the customers choose to satisfy their wants
and needs and will typically encompass many different processes (Buckley &
Webster, 2016). Digital transformation is changing the customers’ behaviors in
unimaginable ways, and this changing and influence of digitalization in the lives
and psychology of customers is very significant for all industries, in particular for
the financial services industry.
The new generation’s ways of acting and reacting to situations have also
changed. The younger generation lives in a different world than their parents
lived through. The millennials who are born between 1980 and 2000 encompass
Shifts in Customer Behavior 7
more than half of the world’s population. They are projected to hold US$7 trillion
as liquid assets in 2020 (Aldridge & Krawciw, 2017). The adoption of technology,
like smartphones and other smart devices is more popular in the millennial gen-
eration and also in digital natives (the generation born after 2000). These youth
prefer digital channels to access services and products, and they can not imagine
life without smartphones or the internet. The recent survey by PwC (2017) about
the digital behavior of customers shows that 46% of the survey respondents use
digital channels, mobiles, tablets, and laptops to access banking services as com-
pared to 27% in 2012. Similarly, the access to banks through brick and mortar
branches has shrunk from 15% to 10%. Increasingly, customers are leaving phys-
ical bank branches and moving to digital channels, which marks a significant
shift in consumer behavior (PwC, 2017).
The digital transformation shift has also changed the expectations and
wants of the customers. Today, customers want banking (or any other service)
from anywhere they are and at any time, regardless of if they are in the office,
or at home in the evenings, or at a beach or in a park at the weekend. This
digital behavior of customers has set a new bar for different services indus-
tries. The industry is trying to fulfill the needs of these digital mindsets by using
omni channels and advanced technologies. The competition among financial
institutions and fintech platforms to provide more customer-centric services is
increasing (Dharmesh, 2016).
In addition, McKinsey7 notes that fintech startups are moving beyond
addressing a customer’s financial needs to offering a wider range of services,
blurring the industry’s boundaries. For example, Social Finance (also known as
SoFi), began offering financial products to students and young professionals but
has since expanded to provide career coaching and networking services. Another
prominent example is Holvi Payment Services, a Finnish start-up acquired by
Spanish financial group Banco Bilbao Vizcaya Argentaria (BBVA) in 2016, that
began by offering banking services to micro, small, and medium-sized enter-
prises (MSMEs) and expanded to provide other paired offerings, such as an online
sales platform, bookkeeping services, expense-claims systems, and a cash-flow
tracker. The scope of products and services offered by fintech companies is
expanding rapidly, from being focused on payment applications, lending, and
money transfers, their reach now extends into areas that include a broad engage-
ment throughout the value chain. The new offerings cut across a wide range of
7 https://www.mckinsey.com/industries/financial-services/our-insights/bracing-for-seven-crit-
ical-changes-as-fintech-matures
financial services: corporate and investment banking, insurance, MSMEs, retail,

and wealth management.
Changes in Engagement and Purchasing Behaviors
Fintech has also introduced a different way to speak to customers—to understand

them, reach out to them through social media channels or any channel the cus-
tomer prefers, and even accept payments through the means of social media.
Businesses can now speak to customers wherever they are at any moment—all
thanks to the rate of mobile technology adoption, omnipresent connectivity, and
the growing socially enabled apps.
Having a better understanding of how customers behave in their channels of
preference also allows businesses to identify the right moment to intervene and
develop a comprehensive strategy that works holistically across channels such
as search, video, social, and display. This leads to the next important change
that happens across industries enabled by their respective fintech solutions—the
context and messaging.
Nowadays, the context of conversation between customers and brands is as
important as ever. The relevance of the message is arguably the most significant
factor predicting the success of the “operation.” Companies need to look at how
people are searching—the questions they ask, the terms they use—and create ads
and content that provide helpful answers.
The ways fintech has contributed to the opportunity to be relevant to every
customer without the need for a million customized solutions are with chatbots
and chat commerce. Built into messaging apps, chatbots come as close to the
customer as possible by being a personal assistant in any endeavor. They provide
a relevant answer and allow them to complete a purchase in an instant. Messen-
ger is an example of a solution that has grown into a platform for chatbots to
connect brands with customers, find the exact product customers are looking for
and provide an opportunity to buy that product in moments.
Structure of the Book
This book looks at the main building blocks to enable trust in impersonal finan-
cial transactions within a highly globalized society. These innovations like artifi-
cial intelligence (AI), big data, blockchain, machine learning, internet of things
(IoT) devices, are the disruptive tools that will play a crucial role in boosting the
financial sector (banking, takaful [insurance], investment, etc.) including the
Structure of the Book 9
Islamic finance sector. Addressing the digital revolution that is happening right
now will foster competitive advantage for the Islamic finance industry.
Fintech is a rapidly growing sector of the financial market, which has evolved
into a very dynamic area through the rise of smartphone penetration and oper-
ational cost reduction. Digital disruption has created a sharing economy having
the potential to share resources via utilization of underused assets by previously
disconnected potential users, and a decentralized scaling power to reach remote
and underbanked populations across the world for the enhancement of finan-
cial access and inclusion. The blockchain industry is one of the first identifiable
large-scale implementations of decentralization models, conceived and executed
to scale the complex levels of human activity, possibly even those who have yet
to be imagined, which could further establish the sharing economy in the Islamic
digital economy.
While this chapter lays down the rationale for financial disruption and
explores the emergence of fintech, Chapter 2 examines the different categories
of technologies that may have been inaccurately lumped under fintech, which
primarily is meant to deal with only the financial industry. In that chapter, we
explore its historical beginnings and expand across its movement and scale
through the global landscape. In doing so, the chapter sets the foundation and
structure, while providing the key concepts needed as a foundation for the under-
standing of the elements discussed in the remaining chapters.
Chapter 3 iterates the significance of fintech within the current financial ser-
vices industry from its popular applications like crowdfunding and peer-to-peer
(P2P) lending to the trends that will shape it like AI, big data, cloud computing and
IoT. Chapter 4 explores the current developments within the Islamic fintech fra-
ternity globally, and tracks the different initiatives being driven by several Islamic
countries in the Gulf Cooperation Council (GCC) and the Association of South-
east Asian Nations (ASEAN). It also discusses the challenges faced and impedi-
ments to Islamic fintech. Chapter 5 begins by relating the increasing investments
into fintech, including the blockchain space, to emphasize the interest in tech-
nology that has caused positive disruptions over the last few years. It discusses
the potency of fintech and the blockchain for the Islamic economy, along with
its potential applications when its capability and strengths are unleashed, very
much like what happened for the internet in the late 1990s.
In Chapter 6, the use cases for blockchain are expanded into several key areas
that are necessary for the Islamic economy. A key application of the blockchain
is the smart contract technology which, along with other enablers like payment,
transaction settlement, registries, and document storage systems, will be essen-
tial for building more efficient and cost-effective blockchain-based versions of
takaful, Islamic capital markets, media rights, property rights, land and title
deeds registries, intellectual property and trademark protection.
Chapter 7 continues the case studies of the applications into the evolution of
the next phase of blockchain where transnational and intergovernmental organi-
zations, like the ASEAN, GCC, International Monetary Fund (IMF), UN, and World
Bank are concerned. There is a scale and jurisdiction consideration that certain
transnational operations can be more effectively administered, coordinated,
monitored, and reviewed at a higher organizational level through a unified block-
chain-based system.
Finally, having laid out the relevance, significance, and developments of
the global fintech community, Chapter 8 provides recommendations for Islamic
institutions to respond in this era of digitization, shifting behaviors of con-
sumers as well as the new challenges that come with it, such as collaboration
models to spur innovation, agility, and scalability along with circumventing
cybersecurity issues.
References
Aldridge, I., & Krawciw, S. (2017). Real-Time Risk: What Investors Should Know about FinTech,
High-Frequency Trading, and Flash Crashes. Wiley. Retrieved from http://gen.lib.rus.ec/
book/index.php?md5=41c5b796f15ea0e66015278bdac66000
Belliger, A., & Krieger, D. J. (2018). The Digital Transformation of Healthcare. In Knowledge
Management in Digital Change (pp. 311–326). Springer.
Boland Jr, R. J., Lyytinen, K., & Yoo, Y. (2007). Wakes of Innovation in Project Networks: The
Case of Digital 3-D Representations in Architecture, Engineering, and Construction.
Organization Science, 18(4), 631–647.
Buckley, R. P., & Webster, S. (2016). FinTech in Developing Countries: Charting New Customer
Journeys (SSRN Scholarly Paper No. ID 2850091). Rochester, NY: Social Science Research
Network. Retrieved from https://papers.ssrn.com/abstract=2850091
Dharmesh, M. (2016). Racing from Digital Engagement to Customer Intimacy. Retrieved from
https://www.temenos.com/en/market-insight/2016/racing-from-digital-engagement-to-
customer-intimacy/
Kenser, K. (2018, March 1). Digital Transformation in Banking and Financial Services. Retrieved
June 30, 2018, from https://www.tatacommunications.com/blog/2018/03/digital-
transformation-banking-financial-services/
Liere-Netheler, K., Packmohr, S., & Vogelsang, K. (2018). Drivers of Digital Transformation in
Manufacturing. In Proceedings of the 51st Hawaii International Conference on System
Sciences.
Matzner, M., Büttgen, M., Demirkan, H., Spohrer, J., Alter, S., Fritzsche, A., … Möslein, K.
M. (2018). Digital Transformation in Service Management. SMR-Journal of Service
Management Research, 2(2), 3–21.
Mićić, L. (2017). Digital Transformation and Its Influence on GDP. ECONOMICS, 5(2), 135–147.
Structure of the Book 11
PwC. (2017). Digital Transformation in Financial Services. Retrieved June 30, 2018, from https://
www.pwc.com/us/en/industries/financial-services/research-institute/top-issues/digital-
transformation.html
Rüßmann, M., Lorenz, M., Gerbert, P., Waldner, M., Justus, J., Engel, P., & Harnisch, M. (2015).
Industry 4.0: The Future of Productivity and Growth in Manufacturing Industries. Boston
Consulting Group, 9.
Scardovi, C. (2017). Digital Transformation in Financial Services. Springer International
Publishing. Retrieved from //www.springer.com/gp/book/9783319669441
Solis, B., Li, C., & Szymanski, J. (2014). The 2014 State of Digital Transformation. Altimeter
Group.
Chapter 2
Fintech—Definition, History, and Global Landscape
Introduction
In the past, fintech was dismissed by traditional financial industry professionals

as new skin on old rails. In actuality, Fintech sets new performance standards and
has the potential to raise traditional banking and financial industry by offering
customer-centric services and upgrading financial products and services designs.
It also promotes greater financial inclusion through better means for customers to
access the financial products and services. This chapter details the definition and
concept of fintech, followed by the evolution and history of its existence. It also
attempts to paint the global landscape of fintech, which includes fintech invest-
ments in major regions including Europe, the United States, Asia, and Africa, to
provide a broad understanding of the changing financial landscape.
Definition and Concept of Fintech
Fintech in the etymological and general perspective is the portmanteau of finan-

cial technology, refers to an emerging financial services sector that is fast becom-
ing indispensable to financial institutions, and is constantly impacting the way
technologies support or enable banking and financial services. Freedman (2006,
p. 1) in his book Introduction to Financial Technology describes financial technol-
ogy as being concerned with building systems that model, value, and process
financial products such as stocks, bonds, money, and contracts. Schueffel (2016)
defined fintech as “a new financial industry that applies technology to improve
financial activities” after making an analysis of more than 200 scholarly studies
over the last forty years. We believe that this newly minted term can be associated
with start-ups and companies that are providing highly innovative and pioneer-
ing financial services or products with the combination of information technol-
ogy (IT) enabling ventures or by using the latest available technology.
Waupsh (2016) explained the three groups of fintech products as white label,
direct, and gold label. “White label” is the type of product that is delivered to
end users of financial institutions through the financial institutions. These prod-
ucts are not developed by the financial institutions themselves but are purchased
from a fintech vendor who developed them. Examples of these products include
Moven’s work with TD bank and Westpac in Canada and Bill Pay from Check-
DOI 10.1515/9781547400966-002
14 Chapter 2: Fintech—Definition, History, and Global Landscape
Free. The second, “direct (to consumers or to business)” is directly delivered from
fintech platforms to consumers and to business. Examples of this type are Stripe,
Venmo, Square, and Wealthfront. The third type, in between the above two, is
“gold label” and has features of both types of products. Like direct, gold label
fintech products are branded solutions to reduce user problems and also have
unique features. But these are also designed for financial institutions to help
them compete like white-labeled products and services. These are also distrib-
uted by the financial institutions. Examples of this type are ApplePay, Dwolla,
and Kasasa.
One of the basic differences between fintech and the bulk of the traditional
financial institutions, is the use of advanced, innovative, and digital technolo-
gies. The traditional financial industry has large built-in IT infrastructures, and
the industry is spending a big part of revenues on IT and its infrastructure like
servers. But the emerging fintech companies are the ones creating products using
more advanced technologies such as internet of things (IoT) devices, mobile
phones, blockchain-based innovations, big data analytics, and machine learn-
ing. By using these technologies fintech companies are providing cheap and
easy-to-access services, from transfers and trading to crowdfunding, while oper-
ating largely outside of the banking regulations.
The “fintech” term was coined by Bettinger in 1972 in his “FINTECH: A Series
of 40 Time Shared Models Used at Manufacturers Hanover Trust Company.” Fin-
tech’s popularity began in the early 1990s and was initially used as a reference
to the “Financial Services Technology Consortium”—a project started by Citi-
group in order to assist technological cooperation efforts. Santarelli (1995) cited
many studies on technological innovation and economic advancement, which
were conducted during the 1980s and 1990s and showed that economic develop-
ment can be enhanced and reinforced through the fusion of new technologies.
However, as Figure 2.1 shows, it was only after 2014 that the sector took off and
attracted the attention of the masses, which included everyone from technolo-
gists and researchers to industry participants, regulators, and consumers alike.
Forward-looking nations started accelerators, incubators, and designed fintech
ecosystems for their industry to thrive and to remain competitive in the increas-
ingly globalized financial environment.
Evolution of Fintech 15
100
75
50
25
Jan 1, DEC 1, Nov 1, OCT 1,

2004 2007 2011 2015
Source: Google trends for “FinTech” search (2018).
Figure 2.1: Group Trends
As such, new and ultra-modern models of business are being introduced in the
market continuously. Fintech has become one of the most dynamic, engaging,
and energetic segments of the financial services marketplace. The most active
areas of fintech are data analytics, artificial intelligence (AI), digital payments,
digital currencies, crowdfunding, and other forms of peer-to-peer (P2P) financ-
ing. Table 2.1 shows the top sectors and investment in those sectors in 2017.
Table 2.1: Investment by Sectors (2017)
Sector Investment (Year 2017)
Mobile Payments US$450 billion

P2P Lending $9 billion
InsurTech $2.1 billion
Blockchain $512 million
Source: Compiled from KPMG, 2018 and Statista, 2018
Evolution of Fintech
There have been four stages (Table 2.2) of industrial revolution, in which the
first Industrial Revolution used steam power and water to mechanize and
increase production. The second Industrial Revolution used electric power
to create the bulk production. The third used advanced electronics and infor-
mation technology to make the production autonomous. Now we are in the
fourth Industrial Revolution that features the digital revolution that started
and has been occurring since the middle of the last century. It is typified by a
fusion of technologies and cyber-physical systems that are blurring the lines
between the economic, physical, biological, and digital spheres.
Table 2.2: Stages of Industrial Revolution
First Stage Second Stage Third Stage Fourth Stage
1780s–end of 1870–start of 1960–1970 1970–present

eighteenth century twentieth century
Start from mechanics, Introduction of The usage of Introduction of cyber

introduction of first electrically-powered electronics and IT physical systems
water- and steam-pow- mass production to achieve further
ered mechanical manu- based on the division automation of manu-
facturing facilities of labor facturing
Source: Modified from Henning (2013).
It is important to discuss three major eras of the fintech evolution. The first era,
known as fintech 1.0, was from 1866 to 1987 where the financial industry, while
progressively became interconnected with technology, was widely still an analog
industry. The next era started in 1987, during which the financial services industry
in developed countries were not only becoming significantly globalized but also
innovative and leveraging on digital technologies. This period was characterized
as fintech 2.0 and this era continued until 2008. During this period, fintech was
largely controlled by the traditional regulated financial industry that used tech-
nology to deliver financial products and services. Since 2008, we saw the emer-
gence of fintech 3.0 where a large number of new entrants (start-ups) and innova-
tive technology companies have started to provide financial services and products
directly to several businesses and the general public. In the following sections,
each fintech era is discussed in detail. Table 2.3 summarizes the fintech evolution.
Table 2.3: Summary of Fintech Evolution
Date 1866–1987 1987–2008 2009–present
Era Fintech 1.0 Fintech 2.0 Fintech 3.0 Fintech 3.5
Geography Global/developed Global Developed Emerging/developing
Key Elements Infrastructure Banks Start-ups/New entrants/innovators
Shift Origin Analogue linkages Digitalization 2008 financial Last mover advantage
crisis
Source: Modified from Arner, Barberis, & Buckley (2015).

Fintech 1.0 (1866–1987)
In the late nineteenth century, the merger of technology and finance created and
established the foundation of the first period of financialization that continued
until the start of World War I. During this period, new technologies such as the
telegraph, transatlantic cable, steamships, and railroads built financial inter-
linkages across the borders, permitting speedy transmission of financial trans-
actions, transfers, and payments around the globe. Meanwhile, the technological
advancements together with essential resources enabled deeper research and
development of new innovations and other existing technologies.
The pantelegraph was invented by Giovanni Caselli in 1865, which was most
commonly used to verify signatures in banking transactions. The very first tele-
graph was introduced in 1838, which was followed by the laying down of the first
transatlantic cable in 1866. It provided the fundamental infrastructure for the
first cross-border financial transaction in the late nineteenth century. In 1900,
consumers and merchants exchanged their goods using credit for the first time
in the shape of charge plates and credit coins. The Fedwire Funds Service was
established in 1918 by the Federal Reserve Banks to transfer funds and connect all
twelve Reserve Banks by telegraph using the Morse code system. It was the first
code system used in the banking industry. J. M. Keynes, the renowned economist
wrote The Economic Consequences of the Peace in 1920 and gave a clear descrip-
tion of the correlation between finance and technology in the first phase of the
modern economic exchange: “The inhabitants of London could order by tele-
phone, sipping his morning tea in bed, the various products of the whole earth in
such quantity as he might see fit, and reasonably expect their early delivery upon
his door-step” (Keynes, 1920, pp. 10–12).
Modern-day credit cards were introduced in 1950 starting with Diners Club.
In 1958 American Express was founded by Frank McNamara. Quotron Systems
introduced the Quotron in 1960, the first electronic system to provide selected
stock market quotations to brokers through desktop terminals. The global telex
network was put in place in 1966, which played a crucial role in providing the
communications necessary for the next stage of financial technology develop-
ment. Code-breaking tools were developed commercially into early computers by
firms such as International Business Machines (IBM), and the handheld financial
calculator was first produced by Texas Instruments in 1967. Barclays Bank intro-
duced the first automated teller machine (ATM) in 1967, calling it a “robot cashier,”
which allowed customers to get cash around the clock. With this, Barclays Bank
arguably marked the commencement of the modern evolution of today’s fintech,
along with the launch of the calculator. The ensuing decades between 1967 and
1987 was the time when financial services moved from an analog to a digital
economy. The Clearing House Interbank Payments System, or CHIPS, was estab-
lished in 1970 to transmit and settle payment orders in American dollars for some
of the largest and most active banks in the world. The NASDAQ—National Asso-
ciation of Securities Dealers Automated Quotations—was established in 1971 in
the United States, which signaled the end of fixed securities commissions. The
Society for Worldwide Interbank Financial Telecommunications, or SWIFT, was
established in 1973 to solve the problem of communicating cross-border pay-
ments. The first online brokerage, E-Trade, was founded in 1982, when it executed
the first electronic trade by an individual investor. It is also worth mentioning that
the first online banking platform was introduced in Britain in 1983 by the Bank
of Scotland for the Nottingham Building Society (NBS) customers. It was called
“Homelink” and became the first internet banking system by connecting via a
television set and the telephone to send transfers and pay bills. The world’s first
online shopper, Jane Snowball, in 1984 used a Gateshead SIS/Tesco system to buy
food from Tesco (Zimmerman, 2016).
Throughout this period, financial services providers enhanced their IT
budget and its use in their financial operations, steadily replacing different types
of paper-based methods and procedures by the 1980s, as computing power devel-
oped and risk management technology proceeded to manage different internal
risks. Among the noteworthy examples of fintech innovations that are widely
recognized by financial experts and professionals would be the Bloomberg ter-
minals. Michael Bloomberg began Innovation Market Solutions (IMS), later to be
known as Bloomberg LP, in 1981 when he left Solomon Brothers, where he used
to design in-house computer systems. IMS called its product Market Master at
first, and the twenty original units operated at Merrill Lynch at the end of 1982.
In the 1980s, stock exchanges from New York to Tokyo were going electronic, a
prerequisite for a truly sophisticated online service for traders. And fortuitously,
Bloomberg terminals were in ever-increasing use among financial services pro-
viders (Arner et al., 2015) along with other forward-looking devices such as the
over-the-air (wireless) portable pocket receiver QuoTrek, which gave instant stock
market quotes to traders. The Bloomberg Terminal of today provides more than
325,000 subscribers (as of October 2016) with everything from an array of infor-
mation on financial matters to a chat system to the ability to actually execute
trades. It processes 60 billion pieces of information from the market a day.
Fintech 2.0 (1987–2008)
The year 1987 is considered historic because the risks regarding cross-border
financial connections and their link with digitalization and technology attracted
the attention of regulators. One of the strong images from this period is that of
the investment banker wielding an early mobile telephone, which was first intro-
duced in the United States in 1983 and completely illustrated in Oliver Stone’s
film Wall Street in 1987. That same year also witnessed the “Black Monday” stock
market crashes whose impact on markets around the world clearly depicted
they were interconnected through technology in a manner not seen since the
1929 crash. Almost thirty years later and there is still no clear consensus on the
causes of the crash, at the time much focus was placed on the use of computer-
ized trading and finance systems by financial services providers, which bought
and sold automatically based on preset price levels. The reaction led to the intro-
duction of a variety of mechanisms, particularly in electronic markets, to control
the speed of price changes (“circuit breakers”). It also led securities regulators
around the world to begin working on mechanisms to support cooperation, in the
way that the 1974 Herstatt Bank crisis and the 1982 developing country debt crisis
triggered greater cooperation between bank regulators in respect to cross-border
issues (Traxpay Team, 2016).
The heavily digitalized financial services industry in the late 1980s was
established on e-transactions between financial industry participants, financial
services providers, and customers around the globe, by using the fax, having
augmented the telex. In 1998 financial products and services had developed for
all practical objectives into the first digital industry. The collapse1 of Long-Term
Capital Management (LTCM) coincided with the Asian and Russian financial
crises of 1997–1998 showed the initial risks and limits enabled by complex com-
puterized risk management systems. However, it is important to be aware that
the highly leveraged nature of LTCM’s business, coupled with a financial crisis in
Russia (i.e., the default of government bonds), caused massive losses and made it
difficult for LTCM to cut its losses in its huge positions, totaling roughly 5% of the
total global fixed-income market, and had borrowed massive amounts of money
to finance these leveraged trades.
However, it was the emergence of the internet that set the stage for the next
level of development, beginning in 1995 when Wells Fargo used the World Wide
Web (WWW) to provide online account checking. By 2001, eight banks in the
United States had one million customers online, with other main jurisdictions
1 Due to the small spread in arbitrage opportunities, LTCM had to leverage itself highly to make
money. At the fund’s height in 1998, LTCM had approximately US$5 billion in assets, controlled
over US$100 billion, and had positions, whose total worth was over US$1 trillion. At the time,
LTCM also had borrowed greater than US$120 billion in assets. https://www.investopedia.com/
terms/l/longtermcapital.asp
around the world rapidly developing the same systems and related regulatory
frameworks to address risk. By 2005 the first direct digital banks having no phys-
ical branches emerged (e.g., ING Direct, HSBC Direct) in the UK.
In the 2000s advancements in internet connectivity paved the way for a host
of new fintech companies to introduce consumer-facing solutions. PayPal was
launched in 1998 and it was among the early fintech companies that started
transforming the way people managed their money through payments. eBay was
also one of the first e-commerce empowerment websites that permitted consum-
ers to create the market and establish prices for auction items. And it all began to
snowball from there (Desai, 2015). Crowdfunding was started by a Boston musi-
cian and computer programmer (Brian Camelio from the United States) when he
first launched a project based on the website with the name of ArtistShare in 2003
(Freedman & Nutting, 2015).
By the start of the twenty-first century, financial institutions’ internal opera-
tions, cross border interactions and an ever-growing number of their connections
with retail customers had shifted to digital mechanisms. Moreover, financial reg-
ulators were becoming habitual of technology usage, particularly when it came to
securities exchanges, which in 1987 was the most reliable source of information
related to market manipulation because their trading systems and records were
computerized.
During this era, it was expected that the e-banking solutions’ providers would
be dominated and supervised by financial institutions, but this is no longer nec-
essarily the case. Although the use of the term “bank” in many jurisdictions is
limited to companies duly regulated as financial institutions, there were many
new entrants, start-ups, and firms called fintech companies providing different
financial services. The fintech companies of that decade were providing services
for transfer, payments, investment management, and lending. Envestnet and
Yodlee were founded in 1999, Mint in 2006, and Credit Karma in 2007 providing
services for personal finance and investment management. Xoom was founded in
2001, and Payoneer in 2005 providing services for money transfer and currency.
Prosper was founded in 2005, Lending Club in 2006, and OnDeck in 2007 pro-
viding lending services. Klarna was founded in 2005, Adyen in 2006, and Brain-
tree in 2007 providing services for payments. Trading and data analysis provider
fintech companies are MarketAxess, which was founded in 2000, Market in 2003
and BATS Global in 2005 (FinTech Switzerland, 2016).
In other words, in developing markets there may be a lack of “behavioral leg-
acies” whereby the public expects that only banks can provide financial services.
For this populace, as it was rightly stated by Bill Gates in 1994, “banking is essen-
tial, banks are not.” Services will be essential to financial transactions but bank
branches will shrink as such services can now be provided on any mobile phone.
Fintech 3.0/3.5
The third era of fintech demonstrated that financial services providers may not
merely rest with regulated financial services industry. The provision of financial
products and services by the institutions called nonbanks may also mean there
is no reliable home financial regulators to act on the concerns of host financial
regulators, and so whether the provider is authorized or not may make a little
difference. It is possible to say that the 2008 Global Financial Crisis was a turning
point and has increased the growth in the fintech 3.0 era.
The post-2008 situation was an alignment of market conditions, which laid
the groundwork for the emergence of innovative market players in the financial
services industry. Among these factors are public perception, regulatory scrutiny,
political demand, and economic conditions. Each of these points is now explored
within a narrative that illustrates how 2008 acted as a turning point and created a
new group of actors applying technology to financial services. Two kinds of indi-
viduals were affected by the financial crisis. On one hand, the common public
developed a distrust of the traditional banking system. On the other hand, many
financial professionals either lost their jobs or were now less well compensated.
This neglected educated workforce found a new industry, fintech 3.0, in which
to apply their skills. From a political perspective, increased unemployment and
reduced availability of credit because of the crisis was a challenge for the govern-
ment regulators. This is the political motivation in the United States behind the
Jump Start Our Business (JOBs) Act in 2012. The JOBs Act was passed to tackle
these issues of unemployment and credit supply in two ways. On employment,
the JOBs Act aims to promote the creation of start-ups by providing alternative
ways to fund their businesses (Arner et al., 2015).
The rise of fintech 3.0 is deeply rooted in the financial crisis, and the erosion
of trust is generated. People’s anger at the banking system was the perfect breed-
ing ground for financial innovation. This is considered as good timing, because
digital natives (millennials) were becoming old enough to be potential customers
and their preferences pointed to the mobile services they understood and mas-
tered, instead of bankers they could not relate to. In this favorable landscape,
fintech providers came in, offering new and fresh services at lower costs, through
well-designed platforms or mobile apps.
The first-version cryptocurrency bitcoin emerged and was introduced in
2009, providing an equivalent type of transaction and also exchange of digital
assets. It is a new type of asset, a new kind of investment. It is opening a cashless
world where people can easily go shopping with a handy device or even their
own valid identity. In 2011 Google pioneered the release of Google Wallet. This
year witnessed the mobile phone giants Apple and Samsung released their e-Wal-
let, Samsung Pay, and Apple Pay. Before the emergence of this payment solu-
tion, PayPal was offering Payment Gate to connect buyers and merchants, which
enforces and implements online payment to be used widely. There are many
fintech companies that have emerged in this era.
Fintech 3.0 started and emerged as a reaction to the financial crisis along
with the JOBs Act in the West, but in Asia and Africa recent and latest fintech
developments have been primarily provoked by the pursuit of economic devel-
opment. Some experts characterize the era as fintech 3.5. In Asia, Hong Kong,
and Singapore have seen the formation of three fintech accelerators in less than
a year, providing them one of the greatest concentrations of fintech accelerators
in the world. Korea also has set up an expanded version of Level 39 (London’s
prominent FinTech coworking space).2 On the regulatory side, Asian regulators
have initiated a Fintech strategy and met in 2013 in Kuala Lumpur to discuss this
agenda alongside the World Capital Market Symposium (Arner et al., 2015).
Eventually, a new sharing economy has emerged and developed, which is
steadily shifting consumers into producers. Robo-advisors are using algorithmic
programming so they can provide automated investment advice and produce
personalized investment portfolios at a fraction of the cost of human advisors.
Online lenders have begun to germinate, providing credit to a widely underserved
market of businesses and consumers largely ignored by the traditional banks.
Crowdfunding sites are also opening digital channels of financing for new entre-
preneurs, many of whom are launching their own fintech start-ups, thus creating
a continual stream of innovation.
Global Landscape of Fintech
Fintech has revolutionized the entire financial services industry by using innova-
tive and advanced technologies such as blockchain, big data and analytics, cloud
computing, AI, IoT, and robo-advisors. By deploying these technologies, fintech
promises to reshape finance by improving efficiency and quality of financial ser-
vices, cutting costs, providing agility, and eventually creating a new global finan-
cial landscape powered by fintech.
2 British fintech investor to set up S. Korean unit, KOREA TIMES (Oct. 22, 2015), http://www.
koreatimes.co.kr/www/news/nation/2015/10/116_189263.html
Global Landscape of Fintech 23
Fintech Investment
From payments to wealth management, from P2P lending to crowdfunding, a new

generation of small firms, entrants, and start-ups is emerging, with fintech firms
attracting US$19 billion in investment in 2015 (up from US$12 billion in 2013).
While 2015 was a record year in terms of deals and dollars invested in venture
capital (VC)-backed companies, 2016 continues to see a noticeable pullback in
activity. At the current run-rates, both deal count and total global funding are
expected to fall significantly under last year’s figures (Su, 2016). In 2017, global
fintech financing hit a new record of US$16.6 billion as compared to 2016 (it was
US$13.3 billion) (CB Insights, 2018).
The segments of fintech that attracted the most investments were InsurTech,
with US$2.2 billion, followed by Direct Lending with US$1.9 billion and P2P lending
(US$1.1 billion). In the infrastructure and enabling technologies category, main
investments went into business tools (US$697 million)—a strong sign of the digital
transformation of enterprises—and cryptocurrencies (US$374 million) (Su, 2016).
Source: https://www.mckinsey.com/industries/financial-services/our-insights/
bracing-for-seven-critical-changes-as-fintech-matures
Figure 2.2: Emerging Fintech Trends
Fintech in Major Regions
Europe
Investment in fintech has witnessed a decline in Europe particularly in VC invest-
ment during Q3’16 due to Brexit vote and market uncertainty. The total number
of fintech deals declined to thirty-eight and investment dropped by half, from
US$400 million in Q2’16 to US$200 million in Q3.
Despite this, in the UK and Ireland especially, the collaborations between
banks and fintech companies continued to increase, such as the Bank of
England’s fintech accelerator, banks are beginning to take space in incubation
hubs to allow direct and ongoing interface with fintech startups. Large financial
institutions are seeking fintech companies as more than an investment. Through
these fintech collaborations, banks want to create and adopt solutions that can
reduce risk and improve customer engagement.
In 2016, in the fintech market of this region, robo-advisory gained traction
in the personal and retail banking sectors, especially for front-line customer
response or as a tool in an advisor’s toolbox. Now, fintech companies are also
looking to combine artificial intelligence with robo-advisory solutions to offer
personalized customer recommendations more efficiently. This type of develop-
ment will attract investors to the European fintech market. Germany also showed
continued strong performance among the European fintech companies and Swit-
zerland made deals with Singapore for future deals (KPMG & H2, 2016b).
In Q3’17, investment in fintech companies in Europe hit US$1.66 billion across
seventy-three deals (KPMG & H2, 2017) Statista forecasted that the transaction
value in the European fintech market amounted to US$640.46 billion in 2017.
This transaction value is expected to show an annual growth rate of 14.5% (CAGR
2017–2021) resulting in a total of US$1.1015 trillion in 2021. It is also estimated
that the number of potential users is expected to amount to 523.4 million by 2021
(Statista, 2016).
United States
The American fintech market has been driven by the advanced technological
developments such as big data and analytics, social networks, and increased
penetration of the smartphone, which have led to the rise of newer models such
as marketplace funding and people-based marketing. Digital connectivity, faster
and instant payment options, lower customer acquisition fee costs through refer-
rals on the social networks have contributed to the growth and innovation of the
fintech space in the United States.
One of the main factors of the development of the fintech market in the United
States is the appetite for such investments. The fintech investments in the United
States had seen a peak from US$1.6 billion in 2010 to US$3.4 billion in 2013. In
2014 and 2015 there was a dramatic rise on investments. In 2014, U.S. investments
almost tripled from US$3.4 billion to around US$ 9.9 billion. The payments sector
attracted the highest proportion of investment followed by the lending space in
2015. The fintech market increased in terms of the transactional value from 2010
to 2015 at a CAGR of over 20% during 2010–2015 (Ken Research, 2016). During
Q3’17, fintech investment in the United States continued to be dominated by deals
being conducted in the U.S. Of the US$5.35 billion invested across the Americas,
the U.S. accounted for over US$5 billion (KPMG & H2, 2017).
Statista forecasted that transaction value in the fintech market amounted to
US$1.026 trillion in 2017. And it is also expected to show an annual growth rate
CAGR of 17.9% during 2017–2021 resulting in the total amount of US$1.983 tril-
lion in 2021 and the number of potential users is expected to amount to 288.0
million by 2021. The expected market’s largest segment is the segment of digital
payments, which will attain a total transaction value of US$738.34 billion in 2017
(Statista, 2016).
We observed that the fintech market in North America witnessed peaks and
valleys in deal activity and investments. In Q1’16, there were 130 deals, which
declined and decreased to 97 deals in Q2’16. Despite this decline in deals, cor-
porate involvement and participation in North American fintech company deals
were reasonable, with California taking the lead in Q2’16 for fintech funding,
beating contender New York by 200% that quarter.
The overall investment in North American fintech dropped under US$1
billion during Q3’16 showing a trend toward smaller deals not a lack of deal activ-
ity. The deal activity in the region was positive during Q3’16. North America saw
96 fintech deals in Q3’16, which was 50% more than in Asia.
The drop-in investment or lack of mega deals in the region during Q3’2016
was due to uncertainties related to the outcome of the U.S. presidential elec-
tion and the timing of the rate hikes in United States. But in Q4’16 there was the
change in the behavior of investors toward fintech markets in the region (KPMG
& H2, 2016b). In Q3’17, investment in the U.S. hit US$5.35 billion across 158 deals
(KPMG & H2, 2017).
Asia
Fintech investment in Asia-Pacific quadrupled in 2015 to US$4.3 billion. Now, it is
the second-biggest region for fintech investment after North America, accounting
for 19% of global financing activity, which is up from just 6% in 2010.
Among the Asian countries, China has the lion’s share of investment, 45% in
2015, but India makes up 38% and is growing fast. Bangalore, Mumbai, Tokyo,
and Beijing are the main fintech hubs in the region by the number of deals.
Looking at deal volumes, 78% went to fintech companies targeting the banking
industry, 9% to wealth management and asset management companies and 1%
to the insurance sector. Payments are the most popular segment for fintech deals
in Asia-Pacific, accounting for 38% of the total (Sparklabs, 2016).
Fintech in Asia faced fluctuated values in 2016, such as a decrease in Q2’16,
but Q3’16 saw growth in fintech funding despite a decline in deal activity. Among
the other regions of the globe, Asia was the only main region that witnessed an
increase in funding between the Q2’16 and Q3’16, with total funding more than
North America. It appears that investors will fix their focus in Asia if the fintech
funding continues to exceed that of North America for extended periods.
The fintech VC investment in Asia with its peaks and valleys revolves around
the worth of US$1 billion plus a large number of deals. For example, lu.com and
JD Finance accounted for approximately half of the overall fintech funding in
Asia in mega deals in Q1’16. Q2’16 witnessed a rapid drop in mega deals. But,
Q3’16 recorded a comeback and attained a high growth in fintech investment;
the two major deals of this quarter were US$449 million to Qufengi and US$310
million to 51xinyongka (also known as U51.com).
The fintech market in Asia observed investor focus in areas such as block-
chain, data analysis, and RegTech. RegTech is mainly to focus on assisting the
regulatory financial institutions in managing their regulatory duties more dili-
gently and effectively. RegTech is gaining attention in the jurisdictions of Hong
Kong, Australia, Singapore, and Malaysia; these jurisdictions have started in this
area due to initiatives by Sand Box. In Asia, India-based investments have seen
a decline because investors focus on higher-quality deals. Singapore aspires to
become a fintech hub of the future.
The VC-backed fintech companies in Asia raised US$1.2 billion in funding
across 35 deals in Q3’16. On a year-over-year basis, Asia fintech funding is on pace
to top 2015’s total by 30% at the current run rate (KPMG & H2, 2016b).
Statista reported that the transaction value in the fintech market in Asia was
US$1.404 trillion in 2017. The transaction value is estimated to show an annual
growth rate (CAGR 2017–2021) of 25.1% resulting in a total amount of US$3.436
trillion in 2021. Statista reported that the transaction value in the fintech market
in Asia was US$1.404 trillion in 2017. Moreover, from a global comparison per-
spective, it has also been shown that the highest transaction value worldwide
was reached in China at US$1.086 trillion in 2017 (Statista, 2016).
Africa
Fintech also has immense potential in Africa and the Middle East. Magnitt, a
networking business for Middle Eastern start-ups, lists fifty-four new fintech com-
panies across the Middle East and North Africa region, twenty in the UAE alone
(Shubber, 2016). The fintech innovators of these regions are M-pesa, Liwwa,
Zoomal, Finerd, PayFort, MadfooatCom, Fawry, and Democrance, etc. These
platforms are providing services include payments, P2P lending, insurance and
wealth management, etc. The payment sector in the Middle East has the highest
potential among fintech innovators (Haley, 2016).
Kenya is the best-known fintech hub in Africa. The technical talent pool is
maturing with improvements in developments and skills. Regionally, Kenya has
a quite stable political environment and attracts fintech companies from other
parts of Africa, especially in the sub-Saharan region. The main fintech companies
are Innova, Pesa Pal, KAPS LTD, Craft Silicon, and big investors are Savannah
Fund, NEST, Centum Investment, Novastar Ventures. M-PESA through its mobile
money transfer system has revolutionized the way Kenya does business. It was
launched in 2007 and within a short time period more than 17 million Kenyans
used M-PESA, which is also accessible on even the simplest mobile phone. MODE
was founded in 2010 and provides instant nano-credit for prepaid mobile phone
users across Africa. It now has operations in thirty-one countries with a customer
base of over 250 million (Deloitte, 2016). Statista forecasts that the transaction
value in the fintech market in Africa Middle East (MEA) amounts to US$59.776
billion in 2017 and it is expected to show an annual growth rate (CAGR 2017–2021)
of 17.3% resulting in a total amount of US$113.269 billion in 2021 (Statista, 2016).
Fintech is a rapidly growing sector of the financial market. It has witnessed
different eras of development along with the different phases of industrial rev-
olution. During fintech 1.0 this sector has gained infrastructural development,
which includes the introduction of technologies such as the first trans-Atlantic
cable and ATM. FinTech 1.0 was limited to analog technologies and due to this,
it remained nonglobalized. Fintech 2.0 was the shifting from analogue to digital
and obviously, it was era that pushed fintech toward becoming more globalized.
New entrants and start-ups emerged and started working in this era, but still,
regulatory financial institutions dominate the financial services industry. Fintech
3.0 emerged after the financial crisis of 2008, which had a catalyzing effect on
the growth of fintech due to growing distrust of formal regulatory financial insti-
tutions; the public welcomed new entrants, such as the massive use of smart-
phones and reduction in operational costs. On a global level, fintech investments
in various regions like the United States, Europe, Asia, and Africa are continu-
ously growing. Fintech has also played a significant role in creating the sharing
economy,3 which has the potential to maximize the utilization of possessions and
transform idle assets so they become productive.
Cryptocurrencies and Initial Coin Offerings
Cryptocurrencies are virtual digital currencies and named as such because cryp-
tographic techniques lie at the heart of their implementation (He et al., 2016). In
modern times the advent of cryptocurrencies is traced to the emergence of the
first cryptocurrency, that is, bitcoin in 2009. Historically, the idea and concept of
storing important information by using cryptographic techniques is considered
older, as the term crypto is taken from an ancient Greek word Kryptos, which
means “hidden.” Some of the records show that ancient Egyptians also used
cryptography as it is evidenced by the use of ciphers by Julius Caesar in 100BC
to 40BC. This means cryptography has historical roots and has passed through
different civilizations (Fry, 2018).
After the emergence of bitcoin in 2009, the experiments in cryptocurrencies
started happening in 2011 with the release of SolidCoin, iXcoin, Namecoin, and
others. As of August 1, 2018, there are more than 1,737 different cryptocurrencies
in the market. This number of cryptocurrencies breaks down into 819 coins and
918 tokens. According to CoinMarketCap data, the combined market of overall
cryptocurrencies to date is valued at $269 billion. Table 2.4 shows the increase in
number of cryptocurrencies from June 2013 to the August 2018.
3 The Sharing Economy matches underutilized assets with potential users. Grab/Go-Jek/Lyft/
Uber and Airbnb have transformed idle assets into economic value—by drastically changing so-
cial behavior and replacing transaction costs in order to match users with assets. In the Sharing
Economy, people must become comfortable enough to trust others so they will forego the ex-
pense of insurance contracts, lawyers, security systems, and even private ownership enforce-
ment, to enjoy the benefits of sharing assets.
Cryptocurrencies and Initial Coin Offerings 29
Table 2.4: Number of Cryptocurrencies Available Since June 2013
Jun 02, 2013 14 Jun 05, 2016 593 (+2%)

Dec 01, 2013 40 (+186%) Dec 04, 2016 645 (+9%)
Jun 01, 2014 298 (+646%) Jun 04, 2017 809 (+25%)
Dec 07, 2014 529 (+78%) Dec 03, 2017 1273 (+57%)
Jun 07, 2015 542 (+2%) Mar 21, 2018 1568 (+23%)
Dec 06, 2015 580 (+7%) Aug 1, 2018 1737 (+10%)
Source: Modified from HiveEx, 2018, lobal Cryptocurrency Exchange Trends, Report & Statistics
March 2018 and CoinMarketCap.com
It is very important to distinguish between cryptocurrencies and “tokens” and

also “cryptosecurities,” as these all are considered cryptoassets. The cryptoto-
kens and cryptosecurities are a very different type of cryptoasset and far beyond
the purpose of medium of exchange as in the attribute of cryptocurrencies.
Cryptotokens are also recorded on distributed ledgers and secured by cryp-
tography. There are different types of tokens on the distributed ledger network.
These cryptotokens have some sort of claims attached to them, and some tokens
resemble traditional shares and bonds. They are referred to as “security tokens” or
“investment tokens” or “equity tokens.” These tokens are the digital presentation
of a share in a company or a cooperation that have the most features of traditional
shares and bonds but represent a very small fraction of worldwide token issuance
(ICO). The more popular ones are those that provide their holders access to future
services and goods. These tokens are referred to as “utility tokens.” Other types of
tokens include “asset-backed token”—tokens that represent some physical asset
like gold or real estate, “vote tokens,” tokens that confer their holder a right to be
involved in a project development and “hybrid tokens,” tokens that are the amal-
gamation and combination of two or more types of tokens.
Cryptosecurities are a concept to securitize assets, just like other securi-
ties, but on the blockchain. According to Burniske and Tatar (2017), until March
2017, there were more than 800 cryptoassets in the market. The international
policymakers including World Bank, IMF and others also taking an interest in
cryptocurrencies. Table 2.5 depicts the perception of policy makers regarding
cryptocurrencies.
Table 2.5: Definitions of Cryptocurrencies
European Central Bank “Cryptocurrencies that are bilaterally linked to the real
(ECB) economy: there are conversion rates both for purchasing
virtual currency as for selling such currency; the purchased
currency can be used to buy both virtual as real goods and
services.”
International Monetary Fund “The cryptocurrencies are the subset of virtual currencies
(IMF) as the digital presentation of a value. The concept of virtual
currencies covers a wider array of ‘currencies,’ ranging from
simple IOUs (‘Informal certificates of debt’ or ‘I owe you’s’) by
issuers (such as Internet or mobile coupons and airline miles),
virtual currencies backed by assets such as gold, and crypto-
currencies such as Bitcoin.”
The Committee on Payments They mentioned cryptocurrencies as digital currencies or

and Market Infrastructures digital currency schemes. These schemes have the following
(CPMI), a body of the Bank features:
for International Settlements – They are assets, the value of which is determined by supply
(BIS) and demand, similar in concept to commodities such as
gold, yet with zero intrinsic value
– They make use of distributed ledgers to allow remote
P2P exchanges of electronic value in the absence of trust
between parties and without the need for intermediaries
– They are not operated by any specific individual or insti-
tution
The European Banking Author- The digital representations of value that are neither issued by
ity (EBA) a central bank or public authority nor necessarily attached to
a fiat currency but are used by natural or legal persons as a
means of exchange and can be transferred, stored or traded
electronically.
The European Securities and The virtual currencies are defined as “digital representations
Markets Authority (ESMA) of value that are neither issued nor guaranteed by a central
bank or public authority and do not have the legal status of
currency or money.”
World Bank WB classified cryptocurrencies as a subset of digital curren-

cies, which it defines as digital representations of value that
are denominated in their own unit of account, distinct from
e-money, which is simply a digital payment mechanism, repre-
senting and denominated in fiat money.
In contrast to most other policy makers, the World Bank has
also defined cryptocurrencies itself as digital currencies that
rely on cryptographic techniques to achieve consensus.
Table 2.5. (continued)
Financial Action Task Force Has approached cryptocurrencies as “a subset of virtual

(FATF) currencies, which it defines as digital representations of value
that can be digitally traded and function as (1) a medium of
exchange; and/or (2) a unit of account; and/or (3) a store of
value, but do not have legal tender status (i.e., when tendered
to a creditor, are a valid and legal offer of payment) in any
jurisdiction.”
Source: Modified from (Houben & Snyers, 2018).
From the different points that are mentioned above by different policymakers,
it appears that there are different perspectives on its definition. The definition
and perspective of World Bank and FATF provides an understanding of crypto-
currencies that they are a medium of exchange having a unit of account and a
store of value but not a legal tender status as there is no central authority that
guarantees them. It is also noteworthy that the different definitions indicate that
the structure and use case of each token is also constantly evolving, making it, at
times, very difficult to categorize them effectively. This is discussed further in the
section “Fiqh View on Coins and Tokens.”
Currently, there are a slew of cryptocurrencies that have been introduced,
and their legality varies across different jurisdictions. Figure 2.3 shows the status
of the cryptocurrencies in thirty selected countries.
Source: Modified from CoinGecko, 2018; Shafi, Patel, Collins,d& Haidermota, 2018.

Figure 2.3: Legality of Cryptocurrencies, 2018
Due to the advent of cryptocurrencies and also blockchain technology the central
banks of major economies started to think and work on their own Central Bank’s
Digital Currency (CBDC). The central banks of different countries are at different
stages regarding CBDC framework.
This is the most interesting time for Islamic countries, especially for the
Organization of Islamic Countries (OIC), to harness this opportunity that block-
chain and the concept of cryptocurrencies offer. OIC has to think and work on the
uniform digital currency for the entire Islamic world. This will be a breakthrough
for the Islamic finance industry as well, which is continuously facing criticism for
following conventional benchmarks since its inception.
One of the major breakthroughs in the crypto world is the emergence and rise
of initial coin offerings (ICOs). It would be clearer if we refer to this term as initial
cryptoassets offerings, as the word “coin” implies that it includes only currencies.
This is defined as a type of crowdfunding that uses blockchain or other distrib-
ute ledger technology as a decentralized P2P network as an underlying system
with the cryptoassets (cryptocurrencies, cryptotokens, and cryptosecurities) on
the top.
Source: Modified from Bank Negara Malaysia, BNM, 2017.

Figure 2.4: Milestones in CBDC by Central Banks
Crowdfunding and ICO, both have several similarities and differences. The simi-
larities are: first, both are used as a way of raising funds for a project or company;
second, in the fundraising process due to a public call for funds, everyone can
invest; third, in both approaches, internet provides the basis for payment and
communication and anyone from anywhere can contribute to any project; and
finally, mostly in both ways of fundraising, contributors get something as a reward
for their contribution. There are some differences in both approaches: foremost,
the difference of an employed system as crowdfunding platforms use centralized
and regulated systems and in contrast, an ICO utilizes a blockchain based decen-
tralized P2P network to conduct operations. And in a crowdfunding campaign,
the platform and banks act as trusted parties while, in an ICO, a network wide
consensus mechanism is involved to verify the transactions.
The first successful ICO was the result of an experiment done by a software
developer, J.R. Willet in 2013. He was excited by the opportunities offered by
blockchain technology and cryptocurrencies like bitcoin and also wanted to do
more with them. He explored that this technology can be used for some complex
functions rather than just sending and receiving payments. He tried to raise
funding in the shape of cryptocurrency by using a blockchain-based decentral-
ized channel. He built a mechanism through which anyone could send or contrib-
ute a bitcoin to the team for the project (MasterCoin) and in return the contribu-
tor would receive tokens as rewards. Finally, Willet’s idea succeeded and in July
2013, his team had a fund of 5,000 bitcoins with a worth of $500. This process of
raising funds was known as an ICO like the term initial public offering (IPO). After
this first ICO, in 2014, Ethereum raised funding for their project in bitcoin (BTC)
valued at $18 million at the time. This was followed by many successful ICOs like
new web browser called “Brave” that in May 2017 generated the amount of $30
million.
Figure 2.5 shows the total investment amount and number of projects,
depending on country of registration.4 Current leading countries are the United
States, UK, and Singapore, while in 2017 the leaders were the United States, Swit-
zerland, Singapore, Estonia, and the UK.
Source: Modified from ICORating, 2018, ICO Market Research Report Q1 2018.

Figure 2.5: Geographical Distribution of Projects by Country Registration
According to the report provided by PwC (2018), the ICO volume between January
2018 and May 2018 is twice as much as it was in the entire year of 2017. The PwC
report states that:
In total, 537 ICOs with a total volume of more than US$13.7 billion have been
registered since the beginning of the year. In comparison, in 2017 there were a
4 Country of registration means the country where the company’s legal entity is registered at the
time of the ICO. If a project does not have a legal entity, it is not included in this table. Country of
project registration is determined on the basis of open data, including projects’ official websites
and open databases of registered companies.
total of 552 ICOs with a volume of just over US$7.0 billion. Also, the average size
of an ICO has almost doubled from US$12.8 million to over US$25.5 million since
last year.
In the first quarter of 2018, the projects related to blockchain infrastructure
and the financial services industry are raising more funds through ICOs followed
by gaming, augmented reality (AR) and wallets. The funds raised by cryptocur-
rencies in that quarter were accounted to be US$4.5 million (ICORating, 2018).
Due to the explosive growth of ICOs, various countries have started to think
about their regulations. In Switzerland, the Crypto Valley has launched its ICO
code of conduct, Thailand is taking the initiative to regulate ICOs, the state of
Arizona in the United States has aimed to define when ICOs would be consid-
ered as securities in Arizona law, UK crypto companies are teaming up to form
a self-regulatory body, German regulatory authorities will publish a note on
ICOs, Austria has planned to make new regulations for ICOs, the United States
also announced that money transmitter rules will be applied to ICOs, the Dutch
finance ministry also called for ICO regulations, Japan authorities have cracked
down against illegal ICO operators, and Gibraltar has announced policies to reg-
ulate ICO tokens as commercial products (CoinGecko, 2018).
ICOs have emerged as a new and relatively easier way of raising funds and
it is expected that they will need more regulations in place as various innovative
ICO structures enter the cryptomarketplace. Some argue that ICOs will disrupt
the overall financing industry, but others consider them as additional options
to venture capitalists, angel investors and crowdfunding platforms due to their
unique features of P2P decentralized networks, use cases and agility.
Cryptoexchanges
As the number of cryptocurrencies has gone beyond 1700 in 2018, the number of
cryptoexchanges is also expanding in the same trend. Cryptocurrency exchanges
are “persons or entities who offer exchange services to cryptocurrency users,
usually against payment of a certain fee (i.e., a commission). They allow crypto-
currency users to sell their coins for fiat currency or buy new coins with fiat cur-
rency. They usually function both as a bourse and as a form of exchange office.”
As compared to only 70 exchanges in 2015, currently, this number exceeds 190
exchanges around the globe. This is due to an increase in demand to buy and
trade cryptocurrencies. Majority of the top cryptoexchanges allowed consumer
to buy, sell and trade cryptocurrencies be it bitcoin, Ethercoin, or Litecoin and
also sovereign fiat currencies like Euros, U.S. dollars, or Yen. Different exchanges
support different types of cryptocurrencies, and some are suited for retailers
while others seem geared toward full time traders or institutions. Table 2.6 exhib-
its the top 15 cryptoexchanges operating at global level.
Table 2.6: The Top 15 Cryptsexchanges (1st half of 2018)
Source: Modified from (Hansen, 2018).
From the regulatory perspective, each exchange is governed by law based on

the location of the exchange. An international exchange has to follow the law
of multi-jurisdictions. Not all the exchanges are regulated, some of them are still
unregulated and vulnerable to regulatory issues. In 2017, due to the complete ban
by the Chinese government on trading of cryptocurrencies, the exchanges based
in China had to move their offices outside the country. At the end of 2017, Japan’s
regulatory authority also suspended these services of cryptoexchanges to the cus-
tomers within the country as per new guidelines issued by the Japanese Finan-
cial Services Agency. As for the United States, the exchanges in different states of
America are subjected to State regulations, which vary from state to state, on top
of compliance to Federal regulations. In New York, the state has implemented
“BitLicense” in 2015 that issued licenses to approved virtual currency businesses.
Unlike the traditional regulated exchanges, decentralized exchange users
have to protect their details of transactions with their own private keys. Being
unregulated, the protection afforded by traditional exchanges are not in place
or enforced. Such decentralized exchanges include EtherDelta, Hodi Hodi, and
AirSwap, but enthusiasts of these decentralized exchanges claim that decentral-
ized exchanges are less susceptible to cyberattacks by virtue of their decentral-
ized network (Olagoke, 2018).
e-Wallets
Historically, the digitization of payments started in the 1960s when electronic

computing penetrated the government and business world. In the meantime,
the banking and finance industry was among the early adopters of digitization.
The consumers of the developed world were able to make payments in the form
of papers and plastic cards. The payment infrastructure was established, where
the major players were banks and the government (central bank). The second
domain or stage of evolution of e-payments arrived with the advent of internet
and ecommerce. In the initial period, the old players offered their services (credit
transfers, direct debits, etc.) online. The old payment services or payment infra-
structure was not developed for the internet and these systems were not optimal
in terms of security and usability. This situation opened up an opportunity for
new entrants and for new services that fit the needs of the internet era. PayPal
is the best example of that era, and still is today. Due to the emergence of new
platforms, especially in the payments industry in 2005, the banks and banking
communities started to introduce their own online banking systems. Banks built
their online websites to attract and engage the tech savvy customers and also
to compete with the emerging platforms. In the meantime, the behavior of con-
sumers was changing and they were becoming increasingly more tech savvy. The
merchants, in a push to remain competitive, offered a diverse range of payment
methods and options to keep their customers and acquire new ones. But these
involved agreements with banks and payment platforms, which had to comply
with financial regulations. At this stage, the payment service providers (PSPs)
used this opportunity to lower the burden of merchants. They made the necessary
arrangements with the banks and payment platforms to reach consumers. Mer-
chants only had to connect once with any PSP and they were dialed in. This new
segment in payments facilitated the rise of digital payments around the globe. In
2009 the PSPs were regulated under Payment Services Directive 1 (PSD1). With
the emergence and appearance of smartphones in 2007, the new stage in the evo-
lution of e-payments began. Smartphones with near field communication (NFC)
technology and QR codes offered a new channel of making payments, which was
called mobile payments, and this laid the foundation for mobile commerce.
The ubiquity of the smartphone removed frictions for all the players in the
payments industry. The myth of “anytime, anywhere, and any device” became a
reality, and made shopping on the go easy and convenient. Amidst these devel-
opments in the payment industry, the big social media channels (Facebook,
WeChat), mobile commerce giants (Alibaba, Amazon), search engine (Google),
and telecoms (Apple and Samsung) started offering their own channels (via apps
and interfaces) for payments on these platforms. Now, we have Apple Pay, Alipay,
Amazon Pay, Google Pay, Samsung Pay, and also Facebook payments. Though
most of these payment options have certain limitations, they mark a great poten-
tial to develop and grow in the future as more and more customers are engaging
with these modes of payments.
Along with these new modes of payments, these channels provide the option
of e-wallets to the consumers (The Paypers, 2017) to facilitate payments using
cryptos. At the global level, the proliferation of e-wallets has intensified with these
brands (Samsung Pay, Apple Pay, and Android Pay). Banks have also started to
compete by developing their in-house e-wallets and merchants are also partner-
ing with banks and fintech start-ups to develop their own e-wallets. According to
a report (Research and Markets, 2018) the global mobile wallet market was valued
at US$594 billion in 2016 and is estimated to reach approximately US$3.14 trillion
by 2022, with CAGR of around 32% between 2017 and 2022.
Table 2.7 exhibits the details related to the general description (definition of
e-wallets), payment instruments, payment guarantee, brands and market reach
of e-wallets.
Table 2.7: All You Need to Know About an e-wallet
General Description An e-wallet is a digital and virtual tool (app or software) that offers con-
sumers the opportunity to store their payment credentials and methods.
It stores users’ credentials of credit, debit cards and also other alternative
payment methods. Some e-wallets are also able to store loyalty programs.
An e-wallet permits an individual to make electronic transactions with an
improved checkout and payment experience compared to reentering and
keying in all payment credentials every time a purchase is conducted. An
e-wallet can function both in physical and online stores.
– e-wallet providers can also be global payment method providers, for
example, Visa and Mastercard; or maybe independent, for example,
Seamless/SEQR
– The term “wallet” is also frequently used for e-money, that is, a stored-
value account for which a license is required
Functions The functions of e-wallets are:

– Interaction alternatives (through social media, e-mail, text messages,
and voice)
– Information access (app search, mapping, product or service discov-
ery, price comparison, information shopping list)
– Security, payments and financial services (identity storage [ID card,
driving license or passport], mobile banking, financial services, P2P
payments, financial details, Instore NFC proximity, security manage-
ment)
– Shopping (digital coupons, promotions, transit tolls, food, ticketing,
travel, entertainment, gift cards and vouchers)
– Customer relationship building (location-based marketing, loyalty
programs and targeted advertising)
Table 2.7 (continued)
Types On the basis of creation of e-wallets, there are three types:

– Closed e-wallets: These are created by an entity for facilitating the
purchase of goods/services from it, for example, GrabPay.
– Semi-closed e-wallets: These are similar to closed e-wallets but users
can get financial services at specific merchants, which have signed a
contract with the developer to accept them, for example, AirTel Money
in India.
Closed and semi-closed e-wallets do not permit cash withdraw or
redemption.
– Open e-wallets: Open wallets can be used to purchase goods and
services at any merchant location that accepts e-wallet (point of sale)
and also to withdraw cash from ATMs and banking correspondents, for
example, M-Pesa.
Payment instrument Depending on the e-wallet provider, several payment methods can be
used: debit card, credit card, gift card, online banking e-payment, direct
debit and recently, cryptocurrencies as well. As of 2017, there were over
150,000 merchants worldwide accepting bitcoin as one of their payment
methods. These are the major retailers like Microsoft, Apple, Amazon,
Walmart, Expedia, eBay, and even coffeehouse giant Starbucks.
Payment guarantee The chargeback risk of an e-wallet depends on the payment instrument
used to top up the e-wallet. For example, PayPal provides consumers a
protection if they are charged for goods they did not purchase or if the
order did not arrive or if the order did arrive but was significantly different
than what was ordered. On the other hand, merchants are protected by
PayPal when selling physical goods that are sold and shipped with proof
of delivery from within the United States to buyers around the globe.
Brands PayPal, Alipay, WeChat Pay, Apple Pay, Samsung Pay, Android Pay, Master-
pass, Paylib, Amazon Pay, SEQR, MobilePay, Lyf Pay, Yoyo Wallet, Chase
Pay, Allied Wallet, Dwolla, Paytm, MobiKwik, Pay by Bank App, PayBack
Market reach United States/Europe: Adoption of e-wallets is slower than initial fore-
casts predicted. However, it is expected that their share will increase in
the next three-five years.
India: Rapidly growing market due to the conjunction of rising smartphone
usage and lack of access to financial services of a large part of the popula-
tion. Also, demonetization in India has proved to be a lucrative opportunity
for e-wallet players (Paytm, Mobiwiki, Snapdeal) in the country.
China: For online payments, the e-wallets (particularly Alipay and WeChat
Pay) are the most popular form of payment.
Source: Modified from Aite, 2016, The Evolution of Digital and Mobile Wallets; The PayPers,
2017, Payment Methods Report 2017.
As mentioned in Table 2.7, the rise of e-wallets is comparatively slow on the Amer-
ican continent and in European countries as compared to Asia. This is justified
by the exploding use of e-wallets in two populous and large economies, namely
India and China. Other Asian countries in that region like Japan, Malaysia and
Indonesia also have active users of e-wallets. Figure 2.6 elucidates this phenom-
enon more clearly.
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
North America Lan America EMEA Asia Pacific
2016 18% 13% 17% 22%
2021 45% 22% 26% 51%
Source: Modified from WorldPay, 2017, Global Payments Report 2017.
Figure 2.6: The Adoption of e-Wallets Worldwide
The adoption of e-wallets is increasing globally with the rising access to smart-
phones and the internet. Distrust of e-wallets, lack of awareness and the lack of
acceptability among FMCG merchants, especially at the grassroots level, will be
needed to be overcome in order for it to truly become indispensable. However, the
future looks promising for e-wallets.
Fiqh View on Coins and Tokens
There is a plethora of studies available that discuss the cryptocurrencies espe-

cially bitcoin and its Shariah appraisal. These studies only focused on crypto-
currencies and Shariah ruling about them and leave the two main types of cryp-
toassets out of the discussion. They mainly conclude that cryptocurrencies like
bitcoin have all the important and basic characteristics of a currency but their
main concerns were articulated around regulatory issues and authority, and high
volatility in prices caused by speculation. Some of the studies also highlight the
issue of criminal use of these cryptocurrencies like terrorism funding thus vio-
lating the antimoney laundering (AML) regulations. In this section, our focus is
cryptoassets, which include cryptocurrencies, cryptotokens, cryptosecurities and
the fiqh (Islamic jurisprudence) view on them.
As per the definition of mal (asset or wealth) according to the fiqh interpreta-
tion of the Shariah, the scholars of the four famous schools of fiqh (Hanafi, Maliki,
Shafi’e, Hanbali) agree that mal can be anything of (1) commercial value means
having natural desirability, (2) having storage ability, and (3) can be owned.
Shariah provides flexibility in the form of mal—it may be tangible or intangible.
As such, cryptoassets can be considered as mal.
For cryptocurrencies, some scholars (especially the gold dinar proponents)
have expressed opinions that they should be backed by a real asset like gold.
Now, we have cryptocurrencies like Onegram as it is claimed that this cryptocur-
rency is backed by gold. Currently, there are also many ICOs that are tokenizing
real assets like real estate, and gold. These ICOs are viewed as less volatile (Fry,
2018). However, in the categorization of cryptocurrencies (coins and alt coins),
its function is like that of sovereign fiat currency, which is a means of exchange.
To attain proper acceptance and full Shariah-compliance, there are some
important conditions that have to be followed. A Shariah-compliant asset can
not be from the list of haram (prohibitions); for example, wine is an asset but it
is not permissible so it is not Shariah compliant (Nordin et al., 2017; Nurhisam,
2017). Another consideration is that its use case cannot violate the Maqasid
Al Shariah (objectives of the Shariah) regardless if the asset is tangible or not.
Hence, the usage of the asset (including goods and services, virtual or real) has
to conform to the spirit of the Shariah, not just its forms. Though the asset itself
has Shariah legitimacy, its eventual usage and practice has to be in accordance
to its intended design.
The first step to recognize the legitimacy of cryptocurrencies is through categoriz-

ing the 1700+ cryptos that are out there. First, we make a distinction between the
two broad categories of the cryptocurrency—coins and tokens:
– A coin is a digital currency, which is used like existing currencies to pay for
goods and services. They are usually built using Bitcoin’s open-sourced pro-
tocol, and typically have no other purpose than to pay for goods and services.
– A token is another form of cryptocurrency (with more features than just cur-
rency), that is usually issued on top of another blockchain. Generally, tokens
represent utility or an asset, or sometimes both. Most tokens exist to be used
with decentralized applications, or dApps.
The critical difference between the two is that tokens are issued through an
ICO, and can take various forms, that is, digital asset (digital rights), means for
accounting (number of API-calls, volume of torrent uploads), share (stake) in a
specific start-up, incentive for using a system or payment among participants.
Source: https://masterthecrypto.com/differences-between-cryptocurrency-coins-and-tokens/
Figure 2.7: Categorization of Cryptocurrencies
From a fiqh perspective, since coins are straight-forward forms of digital curren-
cies, Shariah rules on currency will be applied to them (e.g., cannot be treated like
a commodity to be traded like Forex). ICOs, however, are not so straight-forward.
These types of cryptocurrencies need to be clear in their use case and purpose of
issuance in order to remove confusion and/or deceptive ambiguity (gharar).
The use of the token must be specified clearly—currently, tokens usage can be
generally categorized as (but not limited to):
– Asset-backed token—token that represents some physical asset like gold or
real estate but can also be intangible like talk-time for telcos or GBs of storage.
– Equity token—token that represents some stock or equity in the company that
issues it. However, few companies have attempted such an ICO because it is
tedious, and follows guidelines similar to IPOs.
Progressive Importance of CyberSecurity 43
– Security token—tokens that are securitized are security tokens. Investors

buying them expect profits in form of dividends, revenue share or (most com-
monly) price appreciation. However, they are subjected to securities regula-
tions and limitation on who can invest in these tokens and how they can be
exchanged.
– Utility token—also called application tokens. They are used to provide people
with access to either a product or service. Depending on the ICO strategy,
most tokens are expected to gain in value based on their limited supply.
Each token will be treated differently according to the fiqh understanding of the
Shariah as well as the regulatory authorities because of its nature and usage. Due
to this, its treatment by the regulators as well as the Shariah will be in accor-
dance to its nature and usage—the way they are used as well as the way they were
intended to be used.
As such, it is impossible to give a blanket fatwa (religious ruling) on tokens
when their usage and intended use case can be highly divergent and cross mul-
tiple Shariah rulings. Also, token/ICO design are also constantly evolving; so are
regulations from the appropriate authorities.
As mentioned, these are the guidance notes for the contemporary Islamic
scholars to consider when it comes to the legitimacy of cryptoassets according to
the Shariah. The assessment of Shariah-compliance too should include the pro-
cedural processes from creation to the result of any cryptoassets and its mecha-
nisms. For Muslim participation, before launching a project of any cryptoassets
it should be scrutinized as per Shariah guidelines, and clarification should be
sought from Shariah experts who have the relevant economic, financial and tech-
nical (blockchain and token experience) capability.
Progressive Importance of CyberSecurity
The growth of cryptoassets and cryptoexchanges around the globe is growing to

be relentless. At the same time, cyberattacks have increased, including scamming
and hacking attempts, and these events have become inevitable if money and
wealth is at stake.
The first historical heist happened in the cryptoworld in 2014 when the
largest bitcoin exchange of that time, Mt Gox, was hacked by cyberhackers and
the cryptoexchange was attacked so badly that it had to be declared bankrupt.
This hack was followed by the DAO hack faced by Ethereum in 2016 when the
criminals siphoned away one-third of funds—about US$50 million dollars. The
second largest bitcoin heist happened in the same year in 2016 at a Hong Kong-
based cryptoexchange, Bitfinex, which lost 120,000 BTC that day, worth US$72
million. They have since bounced back into the cryptoworld and back into the
mainstream.
The year 2017 suffered its own attacks when the data from thousands of
servers and nodes were attacked in an unprecedent manner. The entire year of
2017 saw the cryptoexchanges lose around US$66 million in cyberattacks, but
it was much worse in the first half of 2018 according to Roh (2018). So far, it is
recorded that a total of US$761 million has been stolen by hackers from the various
cryptoexchanges. It is also estimated by the report that this value will hit US$1.5
billion by the end of 2018. The two major cryptoexchanges attacks in the first half
of 2018 were the Coincheck hack in Japan, which lost US$500 million and the
Coinrail hack in South Korea where the exchange lost US$40 million (CCN, 2018).
It has also been reported that cryptocurrency is being used as a tool for cyber
extortion payments. With regard to this, the U.S. Financial Crimes Enforcement
Network (FinCen) has banned one of the largest unregulated cryptoexchanges—
BTC-e. The CEO was arrested for his involvement in a 300,000 bitcoin heist. In
that exchange, only 5% of the total transactions were actual bitcoin transactions
and 95% of them were cyber extortion payments (University of Cambridge, 2018).
There are many factors behind the increasing number of cyberattacks includ-
ing lack of right and skilled talent in cybersecurity, especially for exchanges. The
attacks expose massive security concerns on cryptoexchange systems, and their
lack of protection for the assets on their platforms and robustness to respond to
attacks and reduce loopholes within their systems. This requires a clear strategy
of cybersecurity by cryptoexchanges to decipher and defend from attacks in a
decentralized anonymous network.
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Chapter 3
Importance of Fintech and Its Applications
Introduction
This chapter covers the importance of fintech within two important perspectives:
the financial services industry perspective and digitalization or technological per-
spective. Financial innovation is reshaping the different areas of the financial ser-
vices industry, that is, finance and investment, financial operations and risk man-
agement, cost, price, and return, payments, and remittances and crowdfunding.
New digital innovative and advanced technologies are reshaping the value
proposition of existing financial products and services. Fintech is becoming more
and more disruptive by leveraging the latest and advanced technologies such as
blockchain, cloud computing, big data analysis, internet of things (IoT), robo-ad-
visory, and artificial intelligence (AI). In this section, technologies that are being
used by fintech to provide financial services and products are discussed in detail.
By deploying these technologies, financial innovations can provide agility, trans-
parency, cost effective and customer centric products and services.
Today, we live in a connected global world with the availability of the internet
and the beginnings of 5G. The world is going to be better connected and “smarter”
due to the emergence of new innovative and digital tools including smart wear-
ables and devices, smart houses, smartphones, mobile health care, and much
more. In this era of the IoT, the psychological behavior of customers and consum-
ers of every industry has been changed. They demand services, wherever they
are, whenever they want and at any time, quickly. Their approach, thought-pro-
cess, and decision making about products and services have changed.
Financial innovation is rising because technological advancement has
enabled a deeper understanding of consumer behavior and customer prefer-
ences. Getting to the heart of how people buy and receive information to make
their buying decisions is critical to any business today. Cognitive analytics can
also help financial service providers reach out to unbanked and underbanked
people and provide better access to finance for them when psychological biases
are determined, understood, and overcome. This will lead to a great leap toward
financial inclusion.
There has been a storm of financial innovation from the customers’ perspec-
tive, enabled by rising customer expectations for more personalized and digital
experiences, enhanced access to venture capital funding, reduced barriers to
entry and accelerated advancements in technology.
DOI 10.1515/9781547400966-003
50 Chapter 3: Importance of Fintech and Its Applications
Financial Innovation within the Financial Services Industry

Perspective
Payments Industry
Payments in historical perspective have been utility products; basically, transac-

tional and tactical in nature and volume-driven. The reality is that a payment was
often deemed as merely the final and last step in a transaction, with limited and
restricted opportunity to provide value-added solutions or services (BNY Mellon,
2014).
But today it is not the same; the payments industry now is in a state of con-
tinuous change, underlying several cutting-edge economic, technological, and
demographic factors across the length and breadth of the value chain. The indus-
try is witnessing rapid development in innovations across the value chain, thus
making it more splintered. New entrants called nonbanking payment systems in
the form of fintech companies and established big tech giants (PayPal, Apple,
Facebook, Google, Amazon) have caused major disruptions and have nullified
the traditional intermediation in major parts of banking and the payments land-
scape. The first and most effective symbol of the fintech revolution can be per-
ceived within the payments services industry. PayPal is identified as the most suc-
cessful and strongest player in the field of the payment industry. Statistics shows
the net revenue of PayPal during, Q4’16, at 2.98 billion U.S. dollars (Statista, 2016)
(see Figure 3.1).
Source: (Statista, 2016).
Figure 3.1: PayPal’s Quarterly Net Revenue (2010–2016)
Financial Innovation within the Financial Services Industry Perspective 51
Eventually, a payment in 2020 will be about providing strategically important

solutions and transferring value in support of broader activity in several areas
including investment, trade, retail, public and commercial sectors. The PwC
Market Research Center forecasts that the number of noncash transactions will
also grow by 69% from 2013 to 2020 and the transactions value per minute will be
one million (PricewaterhouseCoopers, 2016).
Cloud computing, open source software, big data and analytics, develop-
ers on demand, social media, open app stores for distribution, and blockchain
can, or will, enable rapid technology adoption and deployment in the financial
services industry especially in the fintech sector and in particular, the payments
industry. These technologies could leapfrog antiquated payments mechanisms
and systems in several areas such as cross border payments. In addition, the use
of Bluetooth, NFC, QR codes in contactless merchant-based payments is also
threatening the existing payments models (PricewaterhouseCoopers, 2016).
Figure 3.2: Digital Payments
Digital payments can be defined as noncash transactions processed through

digital channels and include digital commerce, mobile payments and peer-to-
peer (P2P) money transfers. Figure 3.2 illustrates the definitions of these types.
The global market size of digital payments at the end of 2016 is expected to
be US$2.221 trillion. Among the different regions United States accounted for
29% of global digital payments, followed by China who led the mobile payment
transaction value with US$467.7 billion in 2016. Statista forecasts that U.S. mobile
payments will grow at an annual rate of 62% between 2016 and 2021. Digital pay-
ments were one of the main drivers of all fintech transaction value and accounted
for at 85% in 2016 (Statista, 2016). In 2017, with a global transaction value of
US$2.754 trillion, the digital payment segment remained the biggest segment in
the fintech industry (Statista, 2017).
Source: Modified from Statista, 2017.

Figure 3.3: Digital Payments Transactions Value in 2017 (US$ Billion)
Crowdfunding and P2P Lending
P2P lending is defined as “the practice of lending money to individuals or busi-

nesses through online services that match lenders directly with borrowers.” P2P
stands for peer to peer and P2P lending is also called debt-based crowdfunding
and more recently, market place lending or MPL.
The largest P2P platform in the world in terms of issued loan volume and
revenue is the Lending Club, which was launched in 2006 in San Francisco. Table
3.1 shows the financial results of the Lending Club for the quarter, which ended
September 30, 2016.
Table 3.1: Financial Results of Lending Club Q3’2016
Nine Months Ended

Three Month Ended
September 30, 2016
September June 30, 2016 September

($ in millions) 30, 2016 30, 2015 2016 2015
Organizations 1,972.0 $ 1,955.4 $ 2,235.6 $ 6,677.5 $ 5,782.5

Operating Revenue 112.6 $ 102.4 $ 115.1 $ 366.3 $ 292.2
Net Income/ (Loss)1 (36.5) $ (81.4) $ 1.0 $ (113.7) $ (9.6)
Adjusted EBITDA (11.1) $ (30.1) $ 21.2 $ (16.0) $ 45.2
(1) Includes US$1.7 million of goodwill important in the quarter ended September 30, 2016
and US$37.1 million year to date in 2016.
Source: Lending Club Report, Q3’2016.
This is a vigorous and interesting part of financial innovation for lenders due to
the potentially high returns, simplified application process, and quick lending
decisions, but these are linked with high risks because of limited guarantee of the
amount repaid. The opportunities posed by P2P lending may have a significant
impact on financial institutions. P2P lending also provides loans to those entre-
preneurs and small and medium-sized enterprises (SMEs) who can not get loans
from regulated financial institutions, for example, banks. According to Morgan
Stanley, it is expected that marketplace lending will approximate US$290 billion
by 2020, averaging 51% growth per year. But in a more optimistic case, this sector
is seen to be exceeding US$490 billion by 2020 (Coraggio, 2017).
Crowdfunding is a term that refers to a practice of generating funds or capital
investments for a reasonable cause, project, or enterprise by getting funds from
many individuals or organizations. Crowdfunding is adopted when an innovative
and new idea that has the potential to generate revenue and create jobs demands
financial support to become a reality. It mostly takes place on crowdfunding
platforms (CFPs), that is, internet-based platforms that connect fundraisers to
funders with the objective of funding a particular campaign from typically many
individuals (Belleflamme, Omrani, & Peitz, 2015). These CFPs provide access to
funds and capital for a segment of the population who can not easily access it
through traditional means.
Crowdfunding was started by a Boston musician and computer program-
mer (Brian Camelio from the United States) who for the first time launched a
project based on the website ArtistShare in 2003. Maria Schneider’s jazz album
“Concert in a Garden” was the first project of ArtistShare. This campaign raised
about US$130,000 that enabled her to produce music, pay her musicians, etc.
Eventually, her album won the 2005 Grammy Award (Freedman & Nutting, 2015).
After the success of this first CFP, many CFPs have emerged in the market. The
key players in the present global crowdfunding market are Patreon, Gofundme,
Indiegogo, Kickstarter, and Teespring. Other prominent vendors in the market
are CircleUp, Causes, Crowdfunder, Crowdrise, FirstGiving, Fundable, Donor-
sChoose, GiveForward, FundRazr, Gust, Innovational Funding, FundRazr, Kiva,
Innovational Funding, RocketHub, and Youcaring (Research and Markets, 2016).
A research firm provides an overview of the American crowdfunding CFP
as of January 2017, which shows that as of that month, the number of launched
projects on Kickstarter amounted to 335,396, and the success rate among those
amounted to 35.75% (see Table 3.2). Kickstarter is one of the largest platforms in
terms of projects and revenue.
Table 3.2: Key Statistics for Kickstarter
Projects and dollars Projects U.S dollars. Success rates in percent

Launched projects 335,396
Live dollars millions U.S dollars 18
Live Projects 3,788
Success rate (%) 35.75
Successful dollars (billion U.S. dollars) 2.49
Total dollars pledged (billion U.S. dollars) 2.84
Unsuccessful dollars (million U.S. dollars) 3.26
Source: Collated from Statista (2017) and Kickstarter.
Analysts forecast the global crowdfunding market to grow at a CAGR of 26.87%

during the period 2016–2020 (Research and Markets, 2016). Statista forecasted
that transaction value in the crowdfunding segment would amount to US$7.23
billion in 2017 and is expected to show an annual growth rate (CAGR 2017–2021) of
27.3% resulting in the total amount of US$18.97 billion in 2021. It is also estimated
that the average funding per campaign in the crowdfunding segment amounted
to US$992.66 in 2017. In addition, Statista also forecasts that in the crowdfunding
segment, the number of funding campaigns will amount to 13,784,220 by 2021
(Statista, 2016).
The crowdfunding sector has brought innovative disruptive models to giant
existing industries like transportation and real estate, leveraging advanced tech-
nologies and the internet to generate massively scalable businesses. Crowdfund-
ing is an easy-to-access alternative for entrepreneurs as compared to regulated
traditional financial institutions.
Neo-Banking
The emergence of neo-banks is considered as a paradigm shift in the banking

industry (Oracle, 2017). These neo-banks are also called digital only banks, app-
only start-up banks, and challenger banks. Neo-banking is not merely the dis-
tribution of data through the internet. It has in-built vision and aims to reach
customers through digital omni channels and provide the services they want to
them and through the channel of their choice. They do not have a separate digital
team for digital-based projects; rather neo-banks have digital integration in their
core. Neo-banks offer banking services in a simpler way and with a cost edge as
compared to traditional banking products.
There are now about fifty-seven neo-banks operating in different jurisdic-

tions and mostly located in the United Kingdom, like Atom, Monzo, Tandem,
and Metro. These banks have raised millions of dollars of funding from differ-
ent investors. Tandem has raised US$77 million, Starling US$70 million, Atom
US$268 million, and Monzo has raised US$46 million (Skinner, 2017).
These banks are attracting customers in real time with their cheaper and
better offerings to the tech savvy generation of this digital era. These challenger
banks are a very promising avenue for reaching more and more customers through
innovative business models and digital channels.
Asset under Management
It is no doubt that a high level of disruption by financial innovation has already

started to reshape the nature of payment and lending practices; a new wave of
disruption is making its way into asset management. According to the PwC’s
global fintech survey, half of the respondents (53%) from the asset and wealth
management industry expect that this sector is also under disruption by fintech
companies (PricewaterhouseCoopers PwC, 2016a). Blockchain can be leveraged
to build a client profile in a much more efficient way. Storing client profile data on
blockchain allows for data points—profile data, preferences, net worth, account
information, social media profiles—to be shared as needed, with each individual
block of data being stored securely, but permissioned for access by the individual
(read, write, edit) as needed. Also, a decentralized ledger technology allows the
distribution of trusted value transfer and execution, allowing the disintermedia-
tion of authorities: the network becomes the intermediary. In this scenario, master
ledgers held within clearing houses and banks, for instance, will be replaced by
distributed ledgers with no intermediaries.
Regarding asset management, the UK is the largest fund management center
in Europe and the second largest globally, accounting for over £6.2 trillion of
assets under management (David, 2016). To date, blockchain has seen limited
deployment in situations requiring large volumes of data, and the linear nature of
the technology calls into question its ability to handle such a volume. In addition,
firms face product complexity limitations, as initial rollouts of complex products
can be difficult to change later on the distributed ledger.
InsurTech
InsurTech is one the segments of financial innovation addressing existing insur-

ance opportunities, potentials, and challenges.
A 2016 PwC survey showed that insurance companies are very much aware of
the fintech revolution and that 74% of the survey’s respondents deemed financial
innovations as a threat for their industry (PricewaterhouseCoopers, 2016b). It is
the effect of an external factor, such as use of advanced technologies like big data
and analytics and blockchain as well as the rise of the sharing economy and the
ability to improve operations.
Source: PwC (2016) Payments in the Wild Tech World: Digitization and changing customer
expectations.
Figure 3.4: PwC’s Global Survey of Innovation in the Insurance Industry
PwC’S global survey 2016 depicts that 68% of insurance industry players are
dealing with financial innovation and have taken concrete steps to tackle upcom-
ing challenges and/or embrace opportunities. However, only the players who are
most innovative have fintech at heart and want to explore more active ways to
participate in the ecosystem, such as incubators and venture funds.
Insurers are introducing lifestyle apps that give additional consumer value on
a continuing and constant basis. The constant consumer involvement will begin
to reshape price as the key buying criterion. There is the example of Knip, which is
an innovative digital insurance manager that provides users with an easy-to-un-
derstand analysis and overview of existing insurance policies, and services in an
app. Clark is another insurance platform that works similarly to Knip. Insurance
companies should transform digitally and understand the needs of a tech-savvy
generation. Big data analytics can play a major role in this area through generat-
ing intuitive policies from processing massive data of users’ behavior, which can
provide insights into customer needs and forecast their requirements.
Fintech within the Technological Perspective 57
Deploying smart contracts powered by blockchain, customers and insurers

can manage claims in a more transparent, responsive, and irrefutable manner.
Some start-ups such as Blockstream, Everledger, and Tierion are working in this
direction. Several companies such as insPeer, Peercover, Friendsurance, Lem-
onade are effectively using social media. Social media activities are helping
insurance companies to improve their business and connect with customers.
InsurTechs, with the help of IoT, are equipped to offer relevant packages based on
real use and behavior rather than averaged statistics. Domotoz is an IoT solution
for the connected home that offers a platform for home insurers to rate risk and
manage claims (Let’s Talk Payments, 2016).
Fintech within the Technological Perspective
New digital innovative and advanced technologies are, in a way, reshaping the
value proposition of existing financial products and services. Financial innova-
tion is becoming more and more disruptive by leveraging the latest and advanced
technologies. In this section, we elaborate on the technologies being used by
fintech companies to provide better financial services and products.
Blockchain and Its Applications
Blockchain is also called distributed ledger technology. Blockchain is a public

ledger of business transactions. A blockchain network works as intermediator in
a decentralized system for the exchange of assets and information. The two main
technology components are “P2P” or shared data storage and public-key cryptog-
raphy (Mainelli & Milne, 2016).
According to an Accenture report, blockchain is one of the most talked about
topics in the present financial services industry. There are 90% of bank execu-
tives who are interested in blockchain and currently their banks are exploring the
use of blockchain in the payments industry. Moreover, this report also highlights
the benefits of using this technology in the payments industry: lower friction-
less cost, shorter settlement time, reduced errors, new revenue opportunity, and
lower administrative cost (Accenture, 2016a).
More than fifty banks including Barclays and JPMorgan Chase have joined
the R3 consortium. This consortium has objectives to find ways to use the block-
chain as a decentralized ledger to track money transfers and other transactions.
R3 has plans to make its technology open source, which could speed up its wider
adoption. Nasdaq Inc. is already using blockchain in collaboration with start-up
Chain.com for trading securities in private companies. The Australian Stock

Exchange has started working with blockchain start-up Digital Asset Holdings to
catalyze its clearing and settlement services in the equities market (Kharif, 2016).
Fintech start-ups including Chainalysis and IdentifyMind Global are
helping banks comply with KYC (Know your Customer) and AML (Anti Money
Laundering) regulations in the deployment of blockchain for banking services
(Deloitte, 2016b). Santander, UniCredit, Reisebank, UBS, ATB Financial, CIBC,
and the National Bank of Abu Dhabi are all working with Ripple’s technology,
which deploys a distributed ledger of the sort that also underpins bitcoin. HSBC
and State Street have successfully tested blockchain in bond transactions in 2016,
while Bank of America announced a partnership with Microsoft to experiment
with the system (Shen, 2016).
Blockchain technology has a big potential beyond cryptocurrencies such as
in the payments industry, trade finance, capital markets, insurance, and invest-
ment management. There are three main blockchain benefits for the payments
industry: efficiency, disintermediation, and transactions cost reduction. Block-
chain can provide an efficient infrastructure for the speedy settlement of money
movement and decrease the need to use intermediator entities, like banks, for
cross border payments.
We will delve much deeper into this truly revolutionary technology in Chapter
5 as well as its extended use cases in Chapter 6.
Cloud Computing
Cloud computing is the on-demand delivery of compute power, database storage,

applications, and other information technology (IT) resources through a cloud
services platform via the internet with pay-as-you-go pricing. Rather than owning
their own computing infrastructure or data centers, companies can rent access
to anything from applications to storage from a cloud service provider (CSP).
One benefit of using cloud computing services is that firms can avoid the upfront
cost and complexity of owning and maintaining their own IT infrastructure, and
instead simply pay for what they use, when they use it. In turn, providers of cloud
computing services can benefit from significant economies of scale by delivering
the same services to a wide range of customers.
Building the infrastructure to support cloud computing now accounts for
more than a third of all IT spending worldwide, according to research from IDC.1
1 https://www.idc.com/getdoc.jsp?containerId=prUS42831017
Meanwhile, spending on traditional, in-house IT continues to slide as computing

workloads continue to move to the cloud, whether that is public cloud services
offered by vendors or private clouds built by enterprises themselves.
Gartner Research2 predicts that around one-third of enterprise IT spending
will be on hosting and cloud services for the next few years indicating a growing
reliance on external sources of infrastructure, application, management and
security services. Analyst Gartner predicts that half the global enterprises using
the cloud now will have gone all-in on it by 2021.
Cloud computing has become necessary to our economy due to our need for
storing large amounts of data and the requirement to have it accessible easily.
The U.S. National Institute of Standards and Technology (NIST) has defined it
as “as a model for enabling convenient, on-demand network access to a shared
pool of configurable computing resources that can be rapidly provisioned and
released with minimal management effort” (Hawes, 2010). There are three major
categories of cloud computing as services: Infrastructure as a Service (IaaS), Plat-
form as a Service (PaaS), and Software as a Service (SaaS). These cloud services
offer on-demand data access and ubiquitous communications. Cisco forecasted
that CSPs will process more than three-quarters (78%) of IT workloads by 2018.
In TechTarget’s forecast, 80% of the financial services institutions will run on
hybrid cloud architecture by 2018 (TechTarget, 2016).
Big Data Analysis
International Data Corp (IDC) defines big data as “the intelligent economy pro-
duces a constant stream of data that is being monitored and analyzed. Social
interactions, simulations, mobile devices, facilities, equipment, research and
development (R&D), and physical infrastructure all contribute to the flow” (IDC,
2012).
According to IDC, the market for big data technology and services will grow
at a CAGR of 23% through 2019. IDC further predicted that annual spending will
also reach US$48.6 billion in 2019 (Olavsrud, 2015). The volume of data is growing
exponentially, and it is expected that, by 2020, there will be more than 16 zetta-
bytes (16 trillion GB) of useful data generated (Turner et al., 2014).
There are many ways for the financial services industry to achieve business
advantages by mining and analyzing data. These include enhanced detection of
fraud, retail customer service, and improvement of operational efficiencies. Many
2 http://www.gartner.com/smarterwithgartner/cloud-computing-enters-its-second-decade/
fintech companies are also leveraging on big data to provide more customer-fo-
cused and intuitive services.
In 2016, the White House published a report exploring that big data can
be used to reveal or possibly reduce employment discrimination by promoting
efficient and ethical mechanisms for mitigating discrimination in employment
opportunities. The White House report also showed that by using big data, edu-
cational opportunities can be further increased, while improved algorithms that
can potentially help law enforcement become more effective, transparent and less
discriminatory (The White House, 2016). The potential for big data is expected to
impact all sectors, from healthcare to media, from energy to retail (Manyika et
al., 2011).
There are several ways for the financial services industry to achieve business
advantages by mining and analyzing data. These include enhanced detection of
fraud, retail customer service, and improvement of operational efficiencies. Big
data can also be used to identify exposure in real time across a range of sophis-
ticated financial instruments like derivatives. Predictive analysis of both internal
and external data results in good, proactive management of a wide range of prob-
lems from credit and operational risk (e.g., fraud and reputational risk) to customer
loyalty and profitability. Many organizations are building their core business on
their ability to collect and analyze information to extract business insights. Big
data technology adoption within industrial sectors is not a luxury but an impera-
tive need for most organizations to survive and gain competitive advantage.
Internet of Things
The IoT is becoming an increasingly popular topic of conversation in the digital

age. It is a concept that not only has the potential to impact how we live but also
how we work. But what exactly is the IoT and what impact is it going to have?
The IoT, refers to billions of physical devices around the world that are now
connected to the internet, collecting and sharing data. Thanks to cheap proces-
sors and wireless networks, it is possible to turn anything, from a phone to a
drone, into part of the IoT. This adds a level of digital intelligence to devices that
would be otherwise dumb, enabling them to communicate without a human
being involved, and merging the digital and physical worlds.
Processors that were cheap and power-frugal enough to be all but dispos-
able were required before it became cost-effective to connect billions of devices.
The adoption of radio-frequency identification (RFID) tags—low-power chips that
can communicate wirelessly—solved some of this issue, along with the increas-
ing availability of broadband internet and cellular and wireless networking.
The adoption of IPv6—which, among other things, should provide enough IP

addresses for every device the world is ever likely to need—was also a necessary
step for the IoT to scale. Adding RFID tags to expensive pieces of equipment to
help track their location was one of the first IoT applications. But since then, the
cost of adding sensors and an internet connection to objects has continued to fall,
and experts predict that this basic functionality could one day cost as little as 10
cents, making it possible to connect nearly everything to the internet.
According to the Ericsson Mobility Report, 84 million new mobile subscrip-
tions were added in 2016 Q3, hitting to a total of 7.5 billion. The number of mobile
subscriptions is continuing to rise across regions. It is also estimated that by the
end of 2022, there will be 8.9 billion mobile subscriptions. Mobile broadband sub-
scriptions will also reach 8 billion, with a 90% growth rate. Many tablets have
also been sold currently, but their use is limited without a mobile subscription.
The reason of this is that the price difference between WiFi only models and those
with mobile capabilities is still quite significant. Despite this, the number of
tablets and PCs with mobile capabilities through subscription will increase 30%
by 2022. The report also forecasts that by 2022, the number of smartphone sub-
scriptions will reach 6.8 billion, with 95% of the subscriptions registered on LTE,
WCDMA/HSPA, and 5G networks (Ericsson, 2016).
The IoT is an emerging and new paradigm in the science of computers and
technology in a general sense. In recent years, it has invaded our lives without
us being aware of it, yet it is gaining ground as one of the most promising tech-
nologies. The European Commission defines IoT as “things having identities
and virtual personalities operating in smart spaces using intelligent interfaces
to connect and communicate within social, environmental, and user contexts”
(Atzori, Iera, & Morabito, 2010, p. 2).
The IoT was initially most interesting to business and manufacturing,
where its application is sometimes known as machine-to-machine (M2M), but
the emphasis is now on filling our homes and offices with smart devices. The
number of objects able to record and transmit data to other objects is continually
growing. It is forecasted that the number of devices connected to the internet
will increase from 10 billion today to 50 billion by 2020 (Payvision, 2016). The
IoT could give retailers, sellers and their banks access to real-time data on assets
and services that they monitor as well as transparency on their goods in transit
(Santander, 2015).
Robo-Advisors
Robo-advisors are digital platforms that provide automated and algorithm-driven

financial planning services like investing. This service boasts of its ability to
require little to no human supervision. A robo-advisor collects information from
clients about their financial situation as well as their future goals. To do this, you
are asked to answer a survey or a couple of online questions. From this, they use
the data you have entered to offer advice.
The advent of modern robo-advisors has completely changed that narrative
by delivering the service straight to consumers. After a decade of development,
robo-advisors are now capable of handling much more sophisticated tasks,
such as tax-loss harvesting, investment selection and retirement planning. The
industry has experienced explosive growth as a result; client assets managed by
robo-advisors hit US$60 billion at year-end 2015 and are projected to reach US$2
trillion by 2020. Other common designations for robo-advisors include “auto-
mated investment advisor,” “automated investment management” and “digital
advice platforms.” They are all referring to the same consumer shift toward using
fintech applications for investment management.
There are emerging firms that are leveraging on client algorithms and infor-
mation to develop automated portfolio allocation and investment recommen-
dations tailored to the individual customers. Such firms have been termed as
“robo-advisors.” Clients can easily access robo-advisory through digital user
channels for very low fees and sometimes for free (Deloitte, 2016a).
Robo-advisors can eliminate behavioral biases and handle routine account
maintenance without human involvement. They quickly attained market trac-
tion, overseeing US$19 billion by the end of 2014. KPMG and CGI forecast that the
number will hit US$2 trillion in assets by 2020 (Patpatia & Association and CGI,
2016). In addition, KPMG’s 2016 survey forecasted that 75% of survey’s respon-
dents are interested in robo-advisory services (KPMG, 2016). MyPrivateBanking,
a research firm, estimated that hybrid robo services will rise by 2020 to a size
of US$3.7 trillion assets worldwide; by 2025 the total market size will grow to
US$16.3 trillion (MyPrivateBanking, 2016).
A Japanese insurance company, Fukoku Mutual Life Insurance, has replaced
more than 30 of its staff by using IBM Watson cognitive computing software robot
known as Amelia, which can understand the semantics of the language and can
answer business queries like a human. The Japanese company has plans to use
Amelia to read medical documents that are used to assess payments. Although
the robots will eventually calculate payment amounts, the final approval deci-
sions will still be made by qualified human personnel (Computer Weekly, 2017).
The main advantage of robo-advisors is that they are low-cost alternatives to

traditional advisors. By eliminating human labor, online platforms can offer the
same services at a fraction of the cost. Most robo-advisors charge an annual flat
fee of 0.2% to 0.5% of a client’s total account balance. That compares with the
typical rate of 1% to 2% charged by a human financial planner, and potentially
more for commission-based accounts.
Robo-advisors are also more accessible. They are available 24/7 if the user
has an internet connection. Furthermore, it takes significantly less capital to get
started, as the minimum assets required to register for an account are typically
in the hundreds to thousands (US$5,000 is a standard baseline). One of the most
popular robo-advisors, Betterment, has no account minimum at all.
In contrast, human advisors do not normally take on clients with less than
US$100,000 in investable assets, especially those who are established in the
field. They prefer high-net-worth individuals who need a variety of wealth man-
agement services and can afford to pay for them.
Efficiency is another significant advantage these online platforms have. For
instance, before robo-advisors, if clients wanted to execute a trade, they would
have to call or physically meet a financial advisor, explain their needs, fill out the
paperwork, and wait. Now, all of that can be done with the click of a few buttons
in the comfort of one’s home.
Robo-advisors hold the same legal status as human advisors. They must reg-
ister with the U.S. Securities and Exchange Commission to conduct business, and
are therefore subject to the same securities laws and regulations as traditional
broker-dealers. The official designation is “Registered Investment Adviser,” or
RIA for short. Most robo-advisors are members of the independent regulator
Financial Industry Regulatory Authority (FINRA) as well. Investors can use Bro-
kerCheck to research robo-advisors the same way they would a human advisor.
In the United States, assets managed by robo-advisors are not insured by
the Federal Deposit Insurance Corporation (FDIC), as they are securities held for
investment purposes, not bank deposits. This does not necessarily mean clients
are unprotected however, as there are many other avenues by which broker-deal-
ers can insure assets. For example, Wealthfront, the second-largest robo-advisor
in the United States, is insured by the Securities Investor Protection Corporation
(SIPC).
Artificial Intelligence
In 1956, the fathers of “modern” AI, John McCarthy, Marvin Minsky, Allen Newell,
Claude Shannon, Nathaniel Rochester, and Herbert Simon came together for
summer school at Dartmouth College (New Hampshire) under the hypothesis

that every aspect of intelligence and learning can in principle be so precisely
explained that a machine can be made to simulate it. That date is considered the
birth of AI because after that time numerous research groups around the globe
began to engage in the construction of artificial systems with the avowed goal
of equaling, emulating, or even surpassing human mental and physical abilities
(Lungarella et al., 2007). In the 1960s, the U.S. Department of Defense took inter-
est in this type of work and began training computers to mimic basic human rea-
soning. For example, the Defense Advanced Research Projects Agency (DARPA)
completed street mapping projects in the 1970s and produced intelligent virtual
assistants in 2003.
AI is an area of computer science that emphasizes the creation of intelligent
machines that work and react like humans. AI makes it possible for machines to
learn from experience, adjust to new inputs and perform human-like tasks. Using
modern technologies, computers can be trained to accomplish specific tasks by
processing large amounts of data and recognizing patterns in the data.
As such AI has become a hot topic, with many talking about the advantages
that it can bring to the highly regulated financial services industry. AI can help
banks in their anti-money laundering (AML) and counter-terrorism financing
(CTF) screening or employee misconduct detection efforts by replacing costly
functions that are currently done manually by humans (Arslanian, 2016).
Another example is that of the Swedish bank, SEB, which is using AI soft-
ware from IPsoft for its customer service function, after achieving success in an
internal project. While a customer service experience of the future may involve
automation of some kind, the help of a virtual human called a cognitive agent
may be the next evolutionary step. Cognitive agents are virtual assistants that can
supposedly think and act like humans, be able to handle complex interactions
and learn from situations. SEB in Sweden is the first bank that has decided to use
IPsoft’s cognitive technology for customer services (Flinders, 2016). For SEB, it is
all about scalability and the fact that they now have customer service solutions
that they can roll out quickly.
Machine Learning and Deep Learning
Machine learning (ML) is a branch of AI based on the idea that systems can learn
from data, identify patterns and make decisions with minimal human interven-
tion. It was born from pattern recognition and the theory that computers can
learn without being programmed to perform specific tasks; researchers interested
in AI wanted to see if computers could learn from data. The iterative aspect of ML
is important because as models are exposed to new data, they can independently
adapt. They learn from previous computations to produce reliable, repeatable
decisions and results. Essentially it works on a system of probability—based on
data fed to it, it can make statements, decisions or predictions with a degree of
certainty. The addition of a feedback loop enables “learning”—by sensing or
being told whether its decisions are right or wrong, it modifies the approach it
takes in the next iteration (future).
ML applications can read text and work out whether the person who wrote
it is making a complaint, making a contractual agreement, offering congratula-
tions or simply making a declaration. They can also listen to an instruction, deci-
pher the speaker’s accent, and find pieces of information to match the request, or
decide what to do next if the information is unavailable. The idea was to be able
to communicate and interact with electronic devices and digital information, as
naturally as we would with another human being through ML and neural net-
works. Think Siri, Alexa, or Cortana.
Within the field of data analytics, ML is a method used to devise complex
models and algorithms that lend themselves to prediction; in commercial use,
this is known as predictive analytics. These analytical models allow researchers,
data scientists, engineers, and analysts to “produce reliable, repeatable decisions
and results” and uncover “hidden insights” through learning from historical rela-
tionships and trends in the data.3 In the current AI revolution, ML has entrenched
itself to eventually develop human-like AI. In the last few years, we have begun to
hear about deeper concepts than ML—deep learning.
Deep learning is used by Google in its voice and image recognition algo-
rithms, by Netflix and Amazon to decide what you want to watch or buy next,4 and
by researchers at MIT to predict the future.5 MIT designed a predictive system, a
deep-learning method called adversarial learning, wherein two neural networks
try to outsmart each other. Using this technique, the researchers were able to gen-
erate predictions that were deemed to be realistic 20% more often than a baseline
model of other computer-generated methods.
Because deep learning work is focused on developing big data neural net-
works, they become what are known as deep neural networks—complex logic
networks to deal with classifying very large datasets, like Google’s massive image
3 https://www.sas.com/en_sg/insights/analytics/machine-learning.html
4 https://www.forbes.com/sites/bernardmarr/2016/12/08/what-is-the-difference-between-
deep-learning-machine-learning-and-ai/#1980ca7b26cf
5 https://www.ibtimes.com/artificial-intelligence-mit-researchers-create-deep-learning-algo-
rithm-can-peer-2452024
library, or Twitter’s never-ending barrage of tweets. With datasets as comprehen-

sive as these, and logical networks sophisticated enough to handle their classi-
fication, it becomes trivial for a computer to specify something (a lot of things
really) with a high probability of accuracy in what it presents to human beings.
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Chapter 4
Emergence of Islamic Fintech and its
Developments
Introduction
Shariah rules and regulations are the underlying tenets of Islamic finance prod-
ucts. The terms and conditions of these contracts are always written in legal docu-
ments and these documents need to be executed in the right way to ensure proper
compliance. At the moment, the mechanisms are manual and the processes take
a lot of time and are costly. Advanced technologies such as artificial intelligence
and automatable smart contracts have the potential to significantly improve the
overall process, efficiency, transparency, and saving of time.
With the digitalization and technological revolution, the financial services
industry is witnessing the most significant transformational development of the
era, one that is certainly positive and inclusive for these populations. Thus, auto-
mation is increasingly developing not only as a tool that can improve financial
performance, but also functioning as an effective tool to enhance sustainability
and efficiency. Technology has the potential to contribute effectively, particularly
in the area of financial inclusion and sustainable development, offering new
ways for integration for those who are excluded from the financial services indus-
try and have a superior financial and social status, while ensuring that they have
access to a wide range of financial products in line with their values. Rather than
looking at the fintech revolution as unwelcoming, we should leverage on it to
advance economic and social goals in embracing it as an opportunity, because its
potential for social impact is enormous.
There is no doubt that Islamic fintech is at its infancy, and a very limited
number of platforms have emerged. As compared to the global (conventional)
fintech landscape, the size of Islamic fintech is indeed very small. But the start-
ups that have emerged in these last three–four years, have shown credible perfor-
mance and acceptability by the Islamic markets. Islamic crowdfunding has been
the main segment of Islamic fintech still, with several platforms already using
some aspects of blockchain. Four Islamic countries, Brunei Darussalam, Malay-
sia, Bahrain and UAE, have issued regulatory frameworks for fintech to allow the
banks, institutions and start-ups to collaborate and develop innovative business
models and test them within controlled guidelines. These developments show
that the global landscape of fintech adoption will continue to evolve as the regu-
lators and industry work together in key areas of regulatory implications on new
DOI 10.1515/9781547400966-004
70 Chapter 4: Emergence of Islamic Fintech and its Developments
technological advances in the financial sector for responsible development of

products and services.
What Is Islamic Fintech?
As Shariah-compliant finance grows and institutions embrace mobile and inter-

net banking, the sector believes it offers strong opportunities with meaningful
steps being taken to develop fintech ecosystems in key markets to grow the indus-
try. But how does one really define Islamic fintech?1 How does it differ from con-
ventional fintech for that matter?
Etymologically, Islamic fintech is the amalgamation of technology and
Islamic finance, which means that any product or service that spawns from
fintech must abide by the rules extracted from the Qur’an and Sunnah known as
the Shariah. True to its fintech label, its digital distribution of Shariah-compliant
financial products and services is delivered through innovative digital channels
known as omni-channels. Islamic fintech platforms utilize revolutionary technol-
ogies like artificial intelligence (AI), blockchain, big data, extensive cloud com-
puting and internet of things (IoT) devices in providing Islamic financial services
in a more sophisticated and transparent way. Its activities will involve deploying
new tech-based business models to promote economic, environmental, finan-
cial and social goals, which include better services across all Islamic financial
services and product performance, and broader benefits like financial inclusion,
poverty alleviation and social justice. Islamic fintech would enable greater access
to Islamic financial services in cheaper, easier and more efficient ways to provide
opportunities for financing, payments, and investment aligned to the intended
objectives of the Islamic Divine Laws (Maqasid Al-Shariah).
Alignment between Islamic Finance and Fintech
The Islamic financial system has an in-built and inherent character of risk sharing
and rule-compliance. In practice, however, Islamic banking and finance is no dif-
ferent from the conventional finance industry, which relies heavily on risk trans-
fer and/or the shifting of risk from lender to the borrower. This incongruency does
not sit comfortably on the different sections of the Muslim society with regards to
Islamic banking and financial services. Since the emergence of Islamic banking
1 Keep in mind the definition of fintech and the types of fintech products explained in Chapter 2.
Introduction 71
in the 1960s and 1970s, this industry has faced much criticism due to its mim-
icking of conventional interest-based risk-transfer/shifting modus operandi of
banking. Likewise, the consumers of Islamic banks expect guaranteed or fixed
returns similar to existing conventional banks. This is a poor understanding of the
profit-and-loss-sharing mechanism that an ideal Islamic finance system should
uphold. The consumers, like the banks, should be willing to undertake the risk
and share the outcome, be it profits or losses. This is the basis of risk-sharing or
having “skin-in the-game.” Both parties have a vested interest in a transaction
or investment and will likely work closely to achieve shared objectives. The core
values of caring, cooperating, preventing possible harm, etc. are then ingrained
in such agreements.
Today, Islamic banking and finance is heavily based on risk transferring and
risk shifting. The balance sheets of Islamic banks show the concentration of two
products, that is, murabahah, which is trade based mark-ups and ijarah, which
is a lease-based product. Islamic banks have very low percentage of truly risk
sharing products on their balance sheets, which are mudarabah (silent partner-
ship) and musyarakah (joint venture). Also, Islamic banking and finance, which
should have operationalized the ideals of the Shariah to pursue capitalistic goals
alongside social aims, have made little headway in financial inclusion among the
underbanked and unbanked population. The democratization of formal financial
services is indeed crucial for the economic empowerment of the Muslim ummah,
or the general public. The true soul of Islamic finance is to instill inclusivity and
shared prosperity; at this stage, the current Islamic banking model does not seem
fit to the bill. The transformation of Islamic banking institutions from a risk trans-
ferring to risk sharing model, should be built on norms and rules, which are the
essence of a truly Islamic economy. It should not be a system to compete with the
existing interest-based risk-transfer/shifting conventional system. The rhetoric of
Islamic finance literature and conferences are enriched with the discussion of
risk sharing but the real understanding and implementation of the risk sharing
model is very limited and requires a disruption.
Islamic fintech provides the opportunity for the adoption and application of
a risk sharing model in Islamic financial institutions through small innovative
start-ups who want to contribute to the Islamic finance industry. One example
is neo-banking or virtual banks. This Islamic neo-banking model provides
the opportunities for financers and investors who are looking for true Islamic
risk-sharing, interest-free products and services, which are not currently possi-
ble through existing Islamic banks. The modus operandi of the Islamic fintech
should be highly congruent with the asset-backed, interest-free, risk sharing,
under-leveraged real sector model of the ideal Islamic economy.
Islamic fintech can then be articulated through the democratization of finan-

cial services and the delivery of financial services via new digital channels. Its
essence should include the elimination of asymmetric information, fraud, no-con-
fidence and distrust between counterparties, be they financial institutions, regu-
lators, family offices and customers. It also reduces the deceptive ambiguity in the
operations and business models of not only counterparty transactions but creates
positive ripple effects throughout the entire supply chain within the Islamic eco-
nomic eco-system. For instance, monitoring through a public distributed ledger
(blockchain) in the application of smart contracts, Islamic fintech companies can
bring more efficiency and transparency in their operations. Similarly, the usage
of IoT devices in takaful can make insurance claims submission and processing
more nimble and agile. The cash waqf (Islamic endowment) model on blockchain
also could be a great breakthrough in waqf management too.
Social and ethical impacts of financial services are also one of the main
promises of Islamic fintech. For example, the financing for a welfare project is
often not possible through traditional banking and financial institutions, but
now through crowdfunding, take, for example, LaunchGood and Skola Fund, it
is possible for individuals and small businesses of any sector to get funding for
their social impact projects.
Islam and Fintech in History
History has witnessed that Islamic banking at the commercial level started and
emerged in the 1970s. From the banking perspective alone, Islamic finance started
very late in the game as compared to conventional banking, which started in the
1660s with the formation of the Bank of England.
However, in the twentieth century, Islamic revivalists worked to define inter-
est as riba, to enjoin Muslims to lend and borrow at “Islamic Banks” that avoided
interest-bearing fixed rates. By the twenty-first century this Islamic Banking
movement had created “institutions of interest-free financial enterprises across
the world” (Choudhury, 1992). The movement started with activists and scholars
in the late 1940s and early 1950s (Siddiqi, 1981). They believed commercial banks
were a “necessary evil,” and proposed a banking system based on the concept of
mudarabah, where shared profit on investment would replace interest.
And this revival of greater Islamic observance was not unjustified. The devel-
opments in the fields of social sciences, humanities, and natural sciences made
by past Muslims were remarkable. They were the best innovators and inventors
of their times. Their focus was serving time and money on learning, education
Introduction 73
and making inventions. Muḥammad ibn Mūsā al-Khwārizmī2 was one of the first
to have introduced algebra, numeric digits, and the basic notions of algorithms
to the world. These basics of algebra and algorithms are now considered the
pillars of technology since every modern device and technology is based on some
fundamental algorithm. Freedman (2006), in his book Introduction to Financial
Technology clearly mentioned that the father and pioneer of the technological
revolution was the Muslim Mathematician, al-Khwārizmī. The Compendious Book
on Calculation by Completion and Balancing, translated into Latin by Robert of
Chester in 1145, was used until the sixteenth century as the principal mathemat-
ical textbook of European universities.3 Unfortunately, the Muslims to date have
been unable to follow the path of their great ancestors who had made defining
and world-changing concepts, which still reverberate, centuries later, until today.
Nevertheless, the tide of the fintech revolution seemed to have awoken some
segments of the Islamic society. About 120 Islamic fintech players have emerged
on the Islamic fintech landscape; most of these 120 players are less than five years
old. Comparatively, the conventional fintech global landscape consists of more
than 2,000 fintech platforms; half of which have been around more than five
years. In itself, it is encouraging to note that massive frustrations with the current
Islamic banking and finance models are now being translated to wider innova-
tion for improved models and use cases.
The excitement about fintech is not a just fantasy or a passing fad. Fintech is
something that will put the whole financial industry (conventional and Islamic)
on a level playing field. The segment that gives greater priority to innovation
and openness, will capture future market share and dominance. For the Islamic
finance industry, this can erase centuries of lagging behind in the banking game,
and an opportunity to springboard alongside the conventional system to offer
2 Al-Khwarizmi’s treatise on algebra (The Compendious Book on Calculation by Completion and

Balancing, ca. 813–833 CE [8]:171) presented the first systematic solution of linear and quadratic
equations. One of his principal achievements in algebra was his demonstration of how to solve
quadratic equations by completing the square, for which he provided geometric justifications.
He was known as the Father of Algebra. The term algebra itself comes from the title of his book
(specifically the word al-jabr meaning “completion” or “rejoining”). His name gave rise to the
terms algorism and algorithm. His name is also the origin of (Spanish) guarismo and of (Portu-
guese) algarismo, both meaning digit.
3 Fred James Hill, and Nicholas Awde (2003). A History of the Islamic World. p. 55. “‘The Com-
pendious Book on Calculation by Completion and Balancing’ (Hisab al-Jabr wa H-Muqabala) on
the development of the subject cannot be underestimated. Translated into Latin during the 12th
Century, it remained the principal mathematics textbook in European universities until the 16th
Century.”
and deploy competitive products that are Shariah-compliant through the effec-
tive use of new technologies for innovative business models and capabilities to
scale.
Source: Islamic FinTech Landscape Red Money, 2018.

Figure 4.1: Islamic Fintech Landscape
Islamic Fintech Developments Around the Globe
Fintech has begun to penetrate into the Islamic finance space, where these new
Islamic fintech platforms are leveraging on social media data and analyzing them
for practical purposes such as targeted marketing and profiling user behavior.
This section looks at the global landscape of Islamic fintech platforms (see Figure
4.1) and we divide them according to the different categories of their services and
underlying technologies.
Islamic Fintech Developments Around the Globe 75
Islamic Fintech
Islamic fintech can be defined as the technologies that are deployed in Islamic
finance to uphold and entrench Islamic rules and values in order to build a just,
resilient and sustainable economy. It utilizes all the necessary elements of tech-
nology, which will disrupt cumbersome processes, bottlenecks, and inaccessibil-
ity of funds by the underserved segments of society. In the subsequent sections,
we categorize the current existing Islamic fintech platforms and analyze their use
cases and applications for the industry in order to serve their target markets more
efficiently.
Islamic Crowdfunding
Although crowdfunding has only just gotten attention, it has a lengthy history
with roots going back to the 1700s.4 The Statue of Liberty was partly crowdfunded
in 1885 when Joseph Pulitzer, through his newspaper The New York World,
launched a crowdfunding campaign5 to raise the remainder of US$100,000
required to fabricate the base where the statue now stands. They raised $101,091,
from more than 160,000 donors, including young children, businessmen, street
cleaners and politicians.
Modern crowdfunding gained traction in the United States when Brian
Camelio, a Boston musician and computer programmer, launched ArtistShare
in 2003. While conventional modern crowdfunding started to evolve in 2000s,
modern Islamic crowdfunding only started to gain traction a decade later, when
Eureeca formed in 2012.
Beehive
Beehive, based in Dubai, is the UAE’s first online marketplace for peer-to-peer
(P2P) finance. This platform facilitates access and faster processing of small
and medium-sized enterprise (SME) loans for businesses and it also provides an
opportunity for individual investors to generate returns higher than savings rates
in an environment where risks are shared.
Beehive also works with Islamic legal advisors and Islamic financial services
experts to establish structures that permit investments in a Shariah compliant
4 Alexander Pope set out to translate Greek poetry into English in 1713 and asked for subscribers
to pledge two gold guineas to support his work in exchange for acknowledgements of an early
edition of the book.
5 “The Statue of Liberty and America’s Crowdfunding Pioneer.” BBC.com. May 25, 2013.
manner. According to the CEO, Craig Moore, all businesses campaigning on their
site are being checked to make sure that the business activities and the use of
funds comply with the rules and principles of the Shariah. Any business that does
not comply with the Shariah rules will be considered as a conventional invest-
ment and will be processed in the conventional way.
Beehive has launched a platform named Commodity Murabahah Trading
Platform (CMTP) with the cooperation of UAE’S Dubai Multi Commodities Centre
(DMCC). The CMTP facilitates the electronic transfer of ownership and possession
via tradeable warrants (see Figure 4.2). This platform also provides a solution to
the Islamic finance industry and access to locally stored Shariah compliant com-
modities for the execution of commodity murabahah transactions and transfers
ownership and possession electronically. Apart from DMCC CMTP, Dubai also col-
laborates with Emirates Islamic and Emirates Islamic Financial Brokerage (EIFB)
to offer the Nasdaq Dubai Murabahah Platform6—an online platform for Islamic
financing.
Beehive uses commodity murabahah contracts to underpin loans by pur-
chasing and resale of traded commodity on the Dubai Multi Commodities Centre
at specified prices (see Figure 4.2). Beehive, which does not issue loans directly,
has so far 250 funding requests thanks to an explosion of start-ups. It has 6,000
registered investors—mostly from the UAE—and has channeled a total of US$40
million to borrowers according to Forbes7 (17 February 2018). In its first year,
Beehive operated largely on the margins of the UAE’s financial sector before it
received a formal license in March 2017 after the Dubai Financial Services Author-
ity (DFSA) issued regulatory guidelines around P2P lending. New regulations in
Dubai and Bahrain signaled they were embracing fintech, leading to the intro-
duction of fintech funds and accelerators.
With a proper P2P regulatory framework in place, Beehive was able to secure
US$5 million in a first venture round led by Riyad Taqnia Fund in December 2017.
6 The Nasdaq Dubai Murabahah Platform uses wakalah-based (representative or agent-based)

certificates, which enables Islamic financial institution to offer cash financing to customers in a
quick and efficient manner.
7 https://www.forbesmiddleeast.com/en/FinTech-startup-beehive-is-closing-the-gap-for-sme-
finance-in-the-gcc/
Source: Modified from Beehive.com

Figure 4.2: Working Process of Beehive
Easi Up
Easi Up was founded in 2014 in Paris, France. It is a platform that focuses on
educational projects. This platform allows for everyone (namely European resi-
dents) to show and make visible their projects and campaigns for investors to get
investment and funding to convert their dreams into reality. Because of the lack of
proper funding, the activities are limited. But it provides an opportunity to youth
entrepreneurs and students for getting funds for promoting ethical and Shariah
compliant projects through Islamic and ethical ways.
EthisCrowd
EthisCrowd is the world’s first real estate Islamic Crowdfunding Platform that
facilitates the use of funds for real estate projects. Now, the platform has a com-
munity of 17,000 private investors that fund and invest in real estate activities in
Asia.
The platform has established headquarters in Singapore and has branch
offices in Kuala Lumpur, Jakarta, and South Africa. The platform has completed
the real estate project of building houses in Indonesia, which has been crowd-
funded US$2.2. million in its first twenty months.
Source: EthisCrowd, 2016.
Figure 4.3: Track Record of EthisCrowd
The platform also presents opportunities to users who are interested in busi-
nesses and start-ups and can fund them from a minimum of US$800 to get
started. Club Ethis matches investors with a start-up that is based on the indi-
vidual’s background and preferences. It is Shariah-compliant and does not deal
typically with alcohol, pork, gambling, speculation, or loan and interest-based
finance, which captures the Muslim audience and investors from Southeast Asia
and the Middle East.
Ethis has collaborated with different communities and organizations includ-
ing collaboration with TanganDiAtas.com, one of the largest SME/Entrepreneur
groups in Indonesia, Kapital Boost based in Singapore, which provides hybrid
Islamic Crowdfunding and mainly focuses on SMEs, and with LOKAmotion

Malaysia, which is a retail start-up incubator that is making waves in Malaysia.
In 2016, Securities Commission Malaysia awarded six P2P Lending licenses,
one of which is the world’s first license for Shariah-compliant P2P awarded
to Ethis Kapital Sdn Bhd., making them the first authorized platforms in the
ASEAN region.
Eureeca
Eureeca is one of the earliest equity crowdfunding platforms. It provides its mem-
ber-investors, who include casual or angel investors and institutional firms, to
buy shares in growth-oriented businesses. The platform launched in 2013.
The platform has received a license from the UK Financial Conduct Authority
and Securities Commission Malaysia in 2015. The platform has offices in London,
Dubai, and Kuala Lumpur. Eureeca offers potential investment opportunities
from the Middle East, Europe, and Southeast Asia to a wide network of investors,
according to its website (eureeca.com). It is not strictly Shariah-compliant nor
provides halal (permissible according to Islamic rules) financing, but according
to its managing director, Sam Quawasami, the platform provides equity finance,
which in principle, is more aligned with the Islamic finance spirit of risk-sharing
through mudarabah and musyarakah models.
FundingLab
FundingLab is a nonprofit Scottish Charitable Incorporated Organization. The
platform enables the underprivileged young entrepreneurs and students by pro-
viding financing through crowdfunding. The platform has adopted a reward-
based crowdfunding model by making sure it complies with the Shariah.
The platform has a network of investors and users in Pakistan, Palestine,
and Bangladesh and wanted to develop this crowdfunding model to help more
people, especially young entrepreneurs, students, and recent graduates who
want to start their businesses but have no or little capital. The platform intends
to spark the spirit of doing business among Muslim youths, and has initiated
collaborations with different platforms and academic institutions like LUMS, a
renowned university in Pakistan.
Kapital Boost
Kapital Boost was founded in July 2015 specifically to focus and tackle the issues
of lack of Shariah-compliant retail investment opportunities. The platform
mainly focuses on micro, small, and medium-sized enterprises MSMEs, which
will lead to the growth and development of the less privileged communities. This
Singapore-based platform adopted a hybrid crowdfunding model, which involves
reward and donation-based crowdfunding—an option for investors to invest in
MSMEs or partake in a donation campaign. This crowdfunding platform has
received a Shariah pronouncement from the Financial Shariah Advisory & Con-
sultancy (FSAC) on its Murabahah crowdfunding structure. The pronouncement
process took several months to complete. As part of its review, FSAC’s Shariah
Committee was presented with the business model, processes, legal structure,
and documentation relating to Kapital Boost’s crowdfunding. Figure 4.4 depicts
the working processes of Kapital Boost.
Source: Modified from Cosseboom, 2015.

Figure 4.4: Kapital Boost Working Process
Kapital Boost provides asset purchase and invoice financing, which are used to
help MSMEs and meet their capital needs. Kapital Boost matches MSMEs with
investors who pool funds to collectively purchase goods or equipment and there-
after on-selling the same to the SMEs at a markup. Kapital Boost generates com-
petitive annual returns (15–24%) for investors. Additionally, the platform is the
only one in Singapore that does not charge an investor fee. Since its launch in July
2015, Kapital Boost has raised more than S$1.3 million for twenty-six MSME cam-
paigns, with an annualized average return of 22%. As of October 27, 2016, twelve
of the campaigns have paid off their funding.
LaunchGood
LaunchGood is the largest Islamic crowdfunding platform mainly focused on the
Muslim community worldwide, that started operations in October 2013. It is one
of the most active crowdfunding platforms at present. Project creators choose
a maturity date and a minimum funding goal and usually provide rewards for
contributors at different levels. Co-founder and chief operating officer, Amany
Killawi, distinguished LaunchGood from other platforms describing it as an
empathic platform, which helps people raise funds with the help of a comple-
mentary campaign coach to provide support and feedback every step of the way.
She claims that LaunchGood campaigns are twice as likely to succeed than other
campaigns because they are invested in each campaign doing well, because
every success is a success for the Muslim community. Other contributing factors
include having the cheapest fees in the industry and access to a community that
cares and believes in your cause.
Today, they have launched a wide range of crowdfunded projects, including
those that go beyond helping only Muslim communities (e.g., repairing Jewish
cemeteries, rebuilding torched churches, etc.) through their site and have raised
their profile along with millions of dollars in doing so. The platform now has
thousands of active users and donors in almost seventy-five countries, an attri-
bute that reflects their truly inclusive Islamic spirit. Figure 4.5 shows the number
of total projects launched by LaunchGood and quick snapshot of some of its sig-
nificant statistics.
Source: LaunchGood.com
Figure 4.5: Snapshot of Projects and Funds and Coverage as of December 2017
LaunchGood has been featured in 2014 by the American Muslim Consumers Con-
ference’s Entrepreneur Showcase as one of the six emerging start-ups in a shark
tank style competition for a $10,000 prize.
Narwi
Narwi was founded and launched in June 2015 by Silatech in Qatar. It is an online
nonprofit Islamic crowdfunding platform that is enabled and supported by Kiva.
org, which is one of the world’s largest online microlending platforms. The pro-
jected financed by Narwi are financed through Shariah compliant products. The
platform provides services in Palestine, Yemen, Iraq, Jordan, Egypt, Lebanon,
and Somalia, and intends to expand to Morocco and Tunisia.
Narwi is a platform that allows donors to support very small and microen-
terprises. The microentrepreneurs can establish an endowment, or Narwi-Waqf,
with as little as US$25, which created a significant number of jobs in the Middle
East and North Africa.
Shekra
The platform went “live” in Cairo in November 2016. There are seven founders of
this platform who come from very different backgrounds such as aviation, tech-
nology, investment and banking, who have pooled their resources to support
Egyptian start-ups. Shekra established a framework through which it defined
its core characteristics and opportunities that exist in the MENA market. Unlike
other crowdfunding platforms, Shekra relies on a closed network of investors
due to the regulatory restrictions in the MENA region (Marzban & Asutay, 2014).
Figure 4.6 describes Shekra’s process flow.
Source: Marzban & Asutay, 2014.

Figure 4.6: Working Process of Shekra
Skolafund
Skolafund is a web platform for needy students, who have difficulty in paying off
their school fees. They have no choice but to crowdfund for their higher education
goals.
Skolafund went “live” in April 2015 with an alpha version website that lasted
until August 2015. During this first period of four months, the platform raised
approximately RM 25,000 from 125 members of the community to crowdfund six
students. After this success, the team decided to increase their online presence
and have crowdfunded more than forty-two scholarships and counting. They
intend to make higher education accessible and affordable to those who qualify.
They strongly believe that no one should be deprived of education merely because
they can not afford it.
Zoomal
Zoomal was launched in 2013 and asserted itself as a leading platform in the
region. That provides equity crowdfunding. The platform has completed crowd-
funding of 200 projects. The majority of the projects were related to Egypt, Jordan,
Morocco, Algeria, and Lebanon.
The platform provides a financing alternative to the regulated institutions,
i.e. banks and helps the individuals by leveraging the internet and social media
(Oddone, 2015).
It does not specifically target the halal companies or Shariah compliant
finance, but according to its chief executive officer (CEO), Abdullah Abbasi, most
of the projects on the site are actually Shariah-compliant. He went further to
say that they have a plan to develop a certification scheme for projects such as
sadaqah jari’ya (voluntary ongoing charity) as Shariah-compliant products.
Islamic Fintech deploying Blockchain

Blockchain remains as the frontier of new technologies that will enable the fintech
sector to the scale that few other technologies are able to. Successful deployment
of a blockchain-based fintech solution by Islamic startups or institutions would
greatly expand the breadth and depth of who they serve and the extent of how
they can do so.
Blossom Finance
Blossom finance is a start-up that established first in San Francisco and later
relocated to Jakarta, with the intention to focus on microfinance in Indonesia.
Blossom did not make public the details of its first investment in a microfinance
institution in Indonesia until May 2015.
According to Blossom’s CEO, Matthew Joseph Martin, he became a Muslim in
2010 and thus developed an interest in Islamic finance, Blossom only gives money
to those microfinance institutions, which operate on a profit-and-loss-sharing
principle instead of risk transfer of interest-based systems. In fact, Blossom does
not handle loans directly, it works with Shariah-compliant microfinance institu-
tions. They make partnerships with institutions and the underlying process of
collecting and disbursement of funds is operated as a sharing model using the
blockchain technology.
The transfer of money from investors to microfinance institutions is done by

deploying the blockchain technology, which reduces the costs and time, espe-
cially for cross-border money transfers. Through the whole process, Blossom
ensures the implementation and adherence to Shariah rules, so as to move money
within a short time, at low cost and also in a transparent way. The beneficiaries
receive money in local currency (Indonesian Rupiah) and investors can invest
and cash out their returns in local currencies like Euros, British Pounds, and U.S.
dollars (Freischlad, 2016).
GoldMoney Inc.
GoldMoney Inc. is a Canadian fintech company that has received the certifica-
tion of Shariah compliance for its gold-based financial products. It has deployed
blockchain technology for its process of providing financial products or Shari-
ah-compliant financial products. The firm claims that their financial products are
fully backed by gold reserves, and that they use the immutability of the block-
chain ledgers for the collection of money or investments from investors and the
disbursement of funds and returns (Vizcaino, 2017). It is certified by the Bah-
rain-based Accounting and Auditing Organization for Islamic Financial Institu-
tions (AAOIFI), and ensures the implementation of recently launched Halal Gold
standards by AAOIFI (Maierbrugger, 2017).
According to a company statement, it has more than 1.3 million users across 150
countries and manages US$1.7 billion in client assets. They believe that being
Shariah-compliant will considerably raise their profile in the market, and demand
will grow from the Muslim-majority countries globally.
Islamic Robo-Advisors
Robo-advisors are a set of financial advisory tech that provide financial advice
or investment management based on proprietary algorithms and numerical rules
online with moderate to minimal human intervention.
World’s First Robo-Advisor

A robo-advisor called Wahed Invest is the world’s first automated Islamic invest-
ment platform. Initially New York-based, Wahed Invest Inc, a financial advisory
company founded by Junaid Wahedna launched its platform on September 26,
2016. This robo-advisor is an automated platform, which can analyze thousands
of halal securities worldwide to create portfolio allocations with the highest
growth potential for its clients. Its main aim is the provision of easy access to
halal portfolio management for the 2 billion Muslims around the world, as well
as for non-Muslims who want to delve in Islamic ethical investing. Wahed Invest
offers a low minimum investment amount of US$7,500 to start, according to its
website (2016). They are registered with the Securities and Exchange Commission
(SEC) and monitored by its Ethical Review Board. The board includes prestigious
names in international ethical finance, including Sheikh Taha Abdul-Basser,
former Islamic Chaplin at Harvard University and Shariah Board member of Fajr
Capital (Maierbrugger, 2017).
Asia’s First Robo-Advisor

On October 27, 2016, two months after the launching of the world’s first Islamic
robo-advisor, the Kuala Lumpur-based Farringdon Group declared that they
would be introducing Asia’s first Shariah-compliant robo-advisor. This online
tool named “Algebra” will provide automated portfolio and asset management
advice. The platform is available to all investors from any jurisdiction with a
minimum fee of US$200 per month.
Others
This section accounts for all other technology platforms not categorized earlier.
These make up an array of different types of platforms.
Investment Account Platform

Malaysia is undoubtedly one of the key jurisdictions of Islamic finance, where
the Islamic financial services industry has introduced new standards along with
innovative Islamic financial products. The Investment Account Platform (IAP)
is no different. This new initiative is a multibank platform that provides the
cross-border multicurrency channel by linking it to regional and global econo-
mies. It expedites the channeling of funds from institutional investors to provide
financing large viable ventures. The IAP will be able to provide investors with
access to a wide range of investment opportunities, and to the Islamic banks,
new sources of funds. The platform is owned and developed by a wholly owned
unit of Raeed Holdings, IAP Integrated Sdn. Bhd, supported by a consortium of
Islamic banks comprised of Bank Muamalat Malaysia, Maybank Islamic, Affin
Islamic Bank, Bank Islam Malaysia, Bank Kerjasama Rakyat Malaysia and Bank
Simpanan Nasional. It can be expected that more banks will join the platform,
and the number of companies listed is expected to double.
Bursa Suq Al Sila

One other online platform that was launched in Malaysia for commodity Mura-
bahah transactions is the Bursa Suq Al Sila (BSAS) online platform, which was
developed by Bursa Malaysia Bhd. This online platform is a Shariah-compliant
commodity Murabahah trading platform, which provides the facilitation of mura-
bahah and tawarruq8 transactions. The online platform experienced exponential
growth between 2009 and 2014, where it witnessed an annual growth of 178%,
which shows the acceptability and demand of the Shariah-compliant products
mainly from the largely Muslim populations of the MENA and Asian regions.
International Turnkey Solutions “ETHIXS”

International Turnkey Solutions (ITS) “ETHIXS” is a suite of financial products
in Turkey, that provides their Islamic banks comprehensive banking solutions
related to core banking, trade finance, delivery channels, online banking, branch
automation and reports in addition to other banking services. ETHIX is also in full
compliance with the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) and International Accounting Standards (IAS).
The platform offers an integrated system for financial institutions and banks
to deliver Shariah-compliant products. It also empowers Islamic banks to make
improvements in operational efficiency by reducing costs in different areas of
Islamic banking. As a standalone module, it is easy to integrate and offers full
support through its back-end accounting functionalities with straight-through
processing9 (STP) built on a Service Oriented Architecture10 (SOA) platform and
web services-based model.
ETHIXS provides Shariah-compliant software solutions and software-en-
abled services to the Islamic finance industry, and has been awarded the best
Islamic Technology Provider by the Islamic Finance News (IFN) Best Service Pro-
viders’ poll in 2015 mainly due to their strong uptake from many existing clients
8 Tawarruq is a financial instrument where a buyer purchases a commodity from a seller on a

deferred payment basis, and the buyer sells the same commodity to a third party on the spot to
raise capital.
9 Straight-through processing (STP) is an initiative used by financial companies to speed up
the transaction process. STP encompasses a set of internal and external applications, business
processes, and standards that will redefine the settlement and processing paradigm within the
capital markets industry.
10 The service-oriented architecture (SOA) is the technology that breaks down everyday busi-
ness applications into individual tasks or processes that can be cost-effectively restructured and
integrated to provide greater flexibility and responsiveness.
across the Middle East, specifically the Gulf Cooperation Council (GCC), and Asia
Pacific.
As Sidq
The As Sidq platform is Malaysia’s first online and digital Shariah-compliant plat-
form for personal Islamic banking and finance. It was launched and introduced
in 2009 by a Malaysian company called Sedania Corporation Sdn. Bhd.
This platform claimed to provide true halal banking with a completely auto-
mated and online fintech platform that permits financial services providers,
mainly Islamic banks to give cash (liquidity) to their customers on a deferred pay-
ments basis. It also ensures full Shariah compliance and uses the Islamic finance
product based on the tawarruq concept (Majelan, 2017).
As Sidq has received an approval of Bank Negara Malaysia BNM and is in
accordance with the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) international standards according to its website AsSidq.
com. RHB Islamic Bank was the early adopter of this platform, and the platform
has been recognized internationally as an outstanding technological product. As
Sidq has won numerous awards including the “Most Innovative Islamic Finance
Transaction” during the 2010 Sukuk Summit, a winner at the KLIFF Islamic
Finance Awards 2010 as well as Frost and Sullivan’s “Most Innovative Product/
Application of the Year 2010”). To date, approximately 20 financial institutions
have adopted this platform in Malaysia and As Sidq continues to stay ahead
through collaborations with the key players in the industry.
Islamic Fintech Alliance
In April 2016, a cluster of eight Islamic crowdfunding platforms, including Ethis

Crowd, Funding Lab, Kapital Boost, Natwi, EasiUp, Blossom Finance, Launch
Good and Skola Fund joined together to set up an “Islamic Fintech Alliance” (see
Figure 4.7).
Source: islamicFinTechalliance.com
Figure 4.7: Founding Members of the Islamic Fintech Alliance
The primary objectives of this alliance were to foster greater safety and develop
trust by promoting and implementing shared standards for Islamic fintech. They
also wanted to broaden the access of Islamic fintech and its social impact by
ensuring the support and assistance of a wide network of innovators and eventu-
ally to establish and develop a sustainable and truly global ecosystem of Islamic
crowdfunding by both supporting and with the support of regulators and stake-
holders.
World’s First Islamic Endowment Crowdfunding Platform
The former Malaysian prime minister Tun Abdullah Badawi launched the waqf
crowdfunding platform called Waqf World. It was officially revealed as the
world’s first waqf platform at the 12th World Islamic Economic Foundation Forum
(WIEF) held in Jakarta between August 2 and 4, 2016. Initially, the idea of devel-
oping such a platform was proposed by the research center for Islamic Economics
and Finance of Universiti Kebangsaan Malaysia (UKM) in a discussion which was
organized by the Islamic Development Bank’s Research and Training Institute
(IRTI) in January 2016 (Alois, 2016). The managing partner of Waqf World, Adi
Rahman, welcomes any waqf organization from around the globe to list their proj-
ects on the site.
We connect you with partners Partners list campaigns on

from around the world Waqf World
Waqf World partners with authorized We make it simple for our waqf
or recognized Mutawalli and Charity partners to upload campaigns in
Organizations with good track record a clear and transparent manner.
and credibility. Some campaigns are pre-funded.
Receive updates and reports on Select the campaign and make

the impact made your donation
Track progress and understand the Choose from a variety of campaigns

impact of the waqf campaigns you your donation is a permanent
supported. Waqf empowers the endowment the best investment for
Ummah—throughout the world.
akhirah.
Source: Modified from waqfworld.org

Figure 4.8: Working Process of the Waqf World
Waqf is one of the oldest yet the strongest Islamic institution that can unite and
bring socioeconomic development to the Muslim World to bring about positive
change. Hence the development of the Muslim community (ummah) is the focus
of WaqfWorld.org. According to Tun Abdullah Badawi, the former prime minister
of Malaysia, Waqf World uses technology to improve cash waqf flows to mutawal-
lis (who are authorized or recognized waqf trustees or managers) and charities for
their crowdfunding campaigns to raise funds for various initiatives which include
Islamic microfinance, education and human capital development, humanitarian
relief and social enterprises.
Islamic Countries’ Initiatives for Islamic Fintech
There are several cities around the world accelerating toward building Islamic
financial hubs for their region. These leading Islamic financial hubs in differ-
ent regions are taking the lead in exploring the extended use of Islamic financial
technologies within their ecosystems. Although the focus of this section is on
Islamic Countries’ Initiatives for Islamic Fintech 91
Islamic countries’ initiatives, we have included London as well since it is a key

Islamic finance hub for Europe.
Islamic Republic of Pakistan (Islamabad, Lahore)
In the Islamic Republic of Pakistan, 60% of the total population is made up

of youth. Pakistan is suited well to embrace the digital age because of its large
ratio of young population and also their disproportionate excitement toward
technology adoption. Pakistan Telecommunication Authority (PTA) has recently
reported that annual cellular subscribers by March 2017 are more than 139 million
(70% of population) (Pakistan Telecommunication Authority PTA, 2017). Accord-
ing to the GSMA report, Pakistan will have 17 million new unique subscribers by
2020 (GSMA, 2017). The Mobile broadband penetration has also improved from
3% to 16% (PTA, 2016). According to Pakistan Economy survey 2016–2017, which
is published by the Ministry of Finance, Pakistan, the subscribers of 3G and 4G
LTE have expanded to 39.88 million by March 2017, by registering a new 10.3
million subscriptions to 3G&4G LTE networks during July 2016–March 2017 (Govt.
of Pakistan, 2017). The steady growth in the consumerization of IT among Paki-
stanis shows that their behavior and psychology is also changing with gradual
speed that can be translated into a step toward the digitalization of the country.
The level of financial inclusion is very low in Pakistan and it is considered
among the least financially inclusive countries in the world. A large proportion
of the population is unbanked having no access to formal or informal financial
services, and about 85% of the population are underbanked, lacking access to
formal financial services. The high cost of banking infrastructure prevents the
dissemination of financial services beyond a small portion of the population.
However, digitalizing financial services offers a promising solution to overcome
problems of reach and scale. This is attested by a fintech survey done in 2016
(Karandaaz Pakistan and FinSurgents, 2017) whereby 92% of senior executives
and 80% of middle managers interviewed agreed that fintech has a significant
role to play in emerging markets with low financial inclusion. McKinsey & Co.
(Manyika et al., 2016) reported that digital finance has the potential to provide
access to 93 million people in Pakistan alone which will increase to US$263
billion and US$23 billion in terms of new deposits and credit respectively. It will
also provide an opportunity for the Pakistani government to save US$7 billion by
preventing leakage of tax and stopping illicit activities. It also has the potential to
create 7 million jobs in Pakistan and can boost the percentage of gross domestic
product (GDP) 7% ($36 billion) by 2025.
To achieve the goal of digital financial inclusion, the Ministry of IT issued the
“Digital Pakistan Policy” in which they mention the establishing of innovation
centers for fintech in major cities of the country (Ministry of Information Tech-
nology MOIT, 2017). In December 2017, Dr. Umar Ali Saif, the chairman of Punjab
Information Technology Board and Vice Chancellor of Information Technology
University (ITU), Lahore signed a Memorandum of Understanding (MOU) with
Digital Financial Services Research Group (DFSRG) University of Washington
(Seattle, USA) for the establishment of the first FinTech Center in Lahore, Paki-
stan. The chairman explained that this fintech center will be used for activities
including authentication, customer experience studies, cyber security, data ana-
lytics, financial management and fraud prevention, etc. The center will also work
with the financial industry, academia and government and will also promote
digitalization of payments especially Government to Person (G2P) and vice versa
(Ahmed, 2017). The Islamic financial industry in Pakistan also aims to explore
untapped fintech opportunities in the country. For this purpose, the 2nd World
Islamic Finance Forum was held on March 19–20, 2018 at Karachi, Pakistan
and fintech and blockchain were prominent areas in the conference agenda. To
promote the awareness and also to trigger discussions on fintech and blockchain,
a conference was held entitled “Role of Blockchain in Emerging Pakistan” under
the flagship University of CMOSATS Pakistan on April 28–29, 2018. The potential
opportunities that blockchain offers, different models and use cases were dis-
cussed among experts, academicians, and government personnel at the confer-
ence. These developments in policies, collaborations and also other tech-related
events are laying the foundation for a futuristic and robust fintech ecosystem in
Pakistan.
Banks and mobile money providers are embracing and going toward the use
of digital technologies and channels to make their operations and products more
efficient. Meezan Bank Limited, which is one of the Islamic banks of Pakistan
with the largest network in the country, signed an agreement with VMware.inc, a
global leader in cloud infrastructure and business mobility, to meet the growing
demands through IT (Business Recorder, 2017). But, currently, there are only
twelve players including banks, fintechs and mobile money providers in Paki-
stan that have branchless banking licenses. These include UBL, MCB, HBL, JS
Bank, Bank of Punjab, Meezan Bank, Tameer Microfinance with Telenor, Waseela
Microfinance with Mobilink, U-Microfinance with Ufone, Askari Bank with Zong,
Bank Alfalah with Warid and FINCA with Finja. Unfortunately, none has interop-
erability among their services and wallets (Karandaaz Pakistan & FinSurgents,
2017).
Pakistan has some ways to go, and other lessons can be learned from more
advanced countries like implementing regulatory sandbox for fintech, moderniz-
ing existing digital infrastructure, working on interoperability, coordination, and

collaboration, information and communications technology (ICT) and financial
literacy; these are the essential building blocks for developing a robust fintech
ecosystem in Pakistan.
Kingdom of Bahrain (Manama)
Bahrain has been a regional financial center for over four decades and has the
largest concentration of financial institutions and funds registered and domi-
ciled in the region. The financial services sector is the second largest contribu-
tor to GDP (16.5%), and there are over 400 financial institutions licensed in the
Kingdom, including almost 80 conventional banks and 25 Islamic banks. Bah-
rain’s strong ICT infrastructure and established platforms for innovation and
entrepreneurship, make it well-placed to become a regional hub and breeding
ground for fintech investments.
Bahrain’s journey toward fintech was officially initiated by the Central Bank
of Bahrain (CBB) and they subsequently developed a regulatory sandbox for
fintech in June 2017. The CBB aims to provide an innovative and virtual testing
environment to new entrants in the region, which will lead it to becoming the
fintech hub of the Gulf region (Treki, 2017).
Since the development of the first regulatory sandbox in June 2017, CBB has
approved more than five applicants, which included the robo-advisory invest-
ment platform Wahed Invest, BitArabia, an online bitcoin exchange Belfrics, a
London-based forex cash management solution for businesses called Tramonex;
and NOW Money, the Dubai-based account and remittance service for low-in-
come workers in the GCC (Finextra, 2017; Peyton, 2018).
In November 2017, the Bahrain Economic Development Board, and Fintech
Consortium, launched “Bahrain FinTech Bay” (BFB) claiming that it will be the
largest fintech hub in the Middle East and Africa. It is an initiative to create the
environment and provide the platform to accelerators, investors, fintech start-
ups, entrepreneurs, regulatory bodies and financial institutions. The BFB will
be a building consisting of 10,000 square feet of usable space and situated at
Arcapita building overlooking the waters of Bahrain Bay and the Arabian Gulf.
It will be comprised of state-of-the-art facilities, workstations, coworking spaces,
communal areas, hot desks, and a variety of shared infrastructure, making it the
ideal hub for local and international corporate innovation labs and fintech start-
ups to secure bases for themselves (Bahrainedb.com, 2017).
There is also an establishment of a consortium of three Bahraini banks—KFH
Bahrain, a unit of the Kuwait Finance House, Islamic lender Al Baraka Banking
Group and Bahrain Development Bank—to facilitate the development of the

Islamic fintech ecosystem. This consortium aims to establish a company Algo
Bahrain dedicated and specialized for research and development in the area of
Islamic fintech. It will grow and promote Islamic banking in the country through
Shariah-compliant solutions (Townsend, 2017), and aims to launch fifteen fintech
platforms before 2022 (elgilani, 2017).
To further capitalize the opportunity in the Middle Eastern banking industry,
the Kingdom of Bahrain has entered a partnership with the fintech incubator and
ecosystem builder, Singapore FinTech Consortium (SFC), and the asset manage-
ment advisory firm Trucial Investment Partners, to initiate, nurture and sustain
Bahrain’s fintech ecosystem, by leveraging on the expertise of the SFC. These
partnerships form the catalyst that will help to grow and develop the Bahraini
fintech sector, as it enables them to pull together the experience and know-how
of global industry leaders (FinTech Futures, 2017).
Kingdom of Saudi Arabia (Jeddah, Riyadh)
Saudi Arabia has unique demographic and economic features that uphold its
status as one of the most attractive, competitive and sophisticated places for local
and international players. The population of the country is about 33 million and
half of these are under the age of twenty-four. Due to having a high ratio of mil-
lennials and digital natives, the country has one of the highest penetrations of
internet (91%) and also of the mobile subscriptions (171%) (We Are Social, 2018).
The high penetration is due to the robust environment of ICTs in the country.
Saudi Arabia is one of the largest economies in the region of MENA. The
country’s economy witnessed an expansion with an increase of 1.8% in GDP
in 2018 after the oil price crisis. The kingdom has launched the National Trans-
formation Program to stimulate the government activities and investments into
private sector. This program also brought up new reforms to reduce the barrier of
entrance for international investors in the country.
The Crown Prince Muhammad bin Salman has come up with a very clear
manifesto which is called “Vision 2030” on the diversification of the economy
and on bringing moderation into Saudi social culture. This new blueprint aims
to make the country independent from the oil-based economy by developing and
promoting other sectors like tourism and entertainment. In “Vision 2030” tech-
nology is declared to be the heart of all the sectors.
The upshot of the above is that the Kingdom has and is building all the fea-
tures which are essential to develop a vibrant fintech ecosystem in the country. In
this regard, the Saudi Arabian Monetary Agency (SAMA) has very keen interest in
fintech adoption. Their willingness toward adoption of fintech is shown by their

investments in the fintech sector locally and globally. For this purpose, a separate
fund is relaunched named as Public Investment Fund (PIF). This is a principal
vehicle for investments in fintech and also is a part of Vision 2030. One of the
major flagship investments of PIF was to invest in the US$100 billion “Softbank
Vision Fund” supervised by Softbank. This fund has a key role as an investor in
the fintech world. The investment done by the Kingdom in the Softbank fund is
part of Softbank’s US$1 billion investment in US fintech start-up SoFi in 2015 and
also its US$1.4 billion investment in the largest Indian FinTech PayTM initiative
in 2017 (Clifford Chance, 2017).
Different initiatives have been taken within the country. One of these main
initiatives is to set up a Small and Medium Enterprises Authority in 2016 to achieve
the goal of encouraging and involving young and talented entrepreneurs by pro-
viding business and innovation friendly regulations, ease of access to financing,
global collaborations and partnerships and also a major share of national acqui-
sition and government bids. Another major element in the Kingdom’s fintech
ambitions is King Abdullah Financial District situated at the heart of Riyadh. This
will be the biggest business area in the Kingdom. The authorities unveiled that
this will play a key role in making the country a fintech hub.
Recently in February 2018, SAMA has signed an agreement with Ripple, a
global blockchain payments solution provider, to get support for its banks to
deploy and test blockchain based payments (Peyton, 2018). In March 2018, the
largest bank of the Kingdom, Riyad Bank partnered with Gemalto, a technology
provider, for introducing contactless payment wrist bands for their customers.
The bank has also launched Gemalto’s contactless sticker that can easily turn a
mobile device into a contactless payment device (FinTech Futures, 2018).
In July 2018, the Capital Market Authority CMA of the kingdom approved
licenses of the first two fintech players. One is Riyadh-based start-up Manafa
Capital and the other one is Scopeer. Both are allowed to provider crowdfunding
services on a trial basis. The Kingdom has jumped onto the fintech bandwagon
and is keeping on its transformational journey at a constant and balanced pace
to make the country a credible hub for fintech.
Malaysia (Kuala Lumpur)
Malaysia’s journey toward a vibrant fintech ecosystem began with its vision for
the future of Islamic finance through delivering actions today for a sustainable
tomorrow on May 11, 2016. They understood that fintech is challenging the status
quo of the financial industry and new business models will emerge. Delivery
channels will challenge existing norms, but transaction costs will be significantly
reduced. Rather than looking at the fintech revolution as unwelcoming, Bank
Negara urged financial institutions to embrace fintech as an opportunity. By June
2016, Bank Negara Malaysia established a group entitled “Financial Technology
Enabler Group (FTEG).” The operation of this group is to serve as the focal contact
point on fintech-related queries, which involved matters regarding regulation
and the adoption of fintech by the financial services sector.
In July 2016, Bank Negara Malaysia reached out to banks, start-ups and other
stake holders in order to take comments and suggestions from them for a reg-
ulatory framework. Having received over sixty comments and suggestions from
banks (conventional and Islamic), start-ups and other stakeholders, Bank Negara
Malaysia developed its own financial technology regulatory sandbox framework
on October 18, 2016. The framework outlined the objective of facilitating firms
which are looking to test out innovative business models and products that can
improve efficiency, accessibility, quality and security of financial services and
products. The framework also covered opportunities to banks (Islamic and con-
ventional) to take the ideas that can improve risk management mechanisms and
discuss gaps regarding investment in the Malaysian economy. For Islamic finan-
cial services providers, it is emphasized that the innovative and novel solutions
for Islamic financial services must be consistent with and according to the pre-
vailing Shariah standards (Bank Negara Malaysia BNM, 2016).
In 2016, Securities Commission Malaysia in a landmark move, gave approvals
to a series of Equity Crowd Funding platforms: Ata Plus, Crowdonomic, Fund-
edByMe (Alix Global), Eureeca, pitchIN and Crowdplus. Securities Commission
Malaysia also granted approvals to six P2P lending operators, namely Ethis
Kapital, FundedByMe Malaysia, B2B FinPAL, Modalku Ventures, ManagePay Ser-
vices, and Peoplender (“FinTech Malaysia,” 2017).
The year 2017 witnessed and recorded the introduction and launch of numer-
ous key milestones in regulatory development for fintech in Malaysia, as both reg-
ulatory authorities, Securities Commission Malaysia and Bank Negara Malaysia,
acted quickly to support the on-going financial disruption by introducing regula-
tory changes and guidelines as described in Figure 4.9.
Source: https://FinTechnews.my/15690/malaysia/FinTech-malaysia-2017-in-review
Figure 4.9: Bank Negara’s Regulatory Milestones for 2017
Another clear and significant development in the fintech industry in Malaysia has
been seen in the payments sector in 2017. Major payment players like Alipay and
WeChat have entered the Malaysian market. Alipay has arranged participation
with three banks of Malaysia, i.e. Maybank, CIMB bank, and Public bank. Along
with this, Alipay has also received approval from Bank Negara Malaysia to jointly
work with the Touch ‘n’ Go corporation to form TNG Digital. At the same time,
WeChat has received its payments license to legally operate in Malaysia, forming
a partnership with Hong Leong Bank Malaysia.
On the local front many telecommunication companies, like Axiata and Digi
have also jumped into the fray where it is reported that 88 players within the
Malaysian fintech space dominated the payments segment, followed by e-wal-

lets, based on the report entitled “Malaysia: fintech Landscape Report Oct 2017.”11
Another Malaysian initiative worthy of mention is the Multimedia Develop-
ment Corporation (MDeC) which was incorporated in 1996 to oversee the devel-
opment of the Multimedia Super Corridor (MSC) Malaysia and to advise the
Malaysian government on legislation and policies, as well as to set breakthrough
standards for multimedia operations.
Established in the same year, MSC Malaysia’s primary focus was to create
an ideal and conducive platform to nurture Malaysian SMEs in the ICT sector,
to become world-class businesses while attracting participation from global ICT
companies to invest in and develop cutting-edge digital and creative solutions in
Malaysia. Seventeen years on, MSC Malaysia has driven the development of the
Malaysian ICT industry, enhanced technology adoption, and has made signifi-
cant strides in increasing the economic impact and footprint of ICT for the nation.
In October 2010, MDeC was given an additional task by the government,
which was to develop a blueprint for a Digital Economy that draws from the huge
opportunities created by the Digital world. This resulted in a program called
Digital Malaysia that was officially unveiled to the public in May 2012. Digital
Malaysia is a natural progression to harness the building blocks already laid
by MSC Malaysia. Founded on three strategic thrusts, of moving Malaysia from
supply to demand, consumption to production and low knowledge-add to high
knowledge-add, it ultimately aims to create an ecosystem that promotes the per-
vasive use of ICT in all aspects of the economy and the first eight projects are
already under implementation. This will in turn connect communities globally
and enable them to interact in real time, increase the country’s Gross National
Income, enhance business productivity and improve the standards of living. Ulti-
mately, Digital Malaysia aims to turn Malaysia into a developed digital economy
by 2020, that connects and empowers the government, businesses and citizens.
Today, MSC Malaysia and Digital Malaysia run concurrently to spur Malaysia’s
ICT industry development and digital economic growth, under the purview of
MDEC, which has since been renamed as Malaysia Digital Economy Corporation.
11 https://www.internetalliance.my/wp-content/uploads/2018/02/FinTech-Malaysia-Land-
scape-Report_Oct2017.pdf
Republic of Indonesia (Bandung, Jakarta, Surabaya, Yogyakarta)
The Republic of Indonesia is the largest economy in South East Asia Pacific
having a population of over 260 million. Sixty percent of the overall population
are under the age of thirty-five who are considered as digital natives brought up in
the era of internet. There is a high rate of internet and mobile penetration among
these millennials and digital natives and this rate of penetration is constantly
growing. This makes Indonesia a treasure trove of maiden fintech opportunities.
Indonesia is one of the earlier adopters of fintech in the region as Indone-
sia developed a fintech ecosystem before Malaysia and Brunei Darussalam due
to having an edge in market size. The fintech market is steadily growing in the
country with the annual growth rate of 16.3%. The exact figure of total invest-
ments in the fintech sector can not be estimated (as majority of the investments
are undisclosed); the total disclosed investments alone in 2017 are valued at
US$176.35m. Table 4.1 shows the detail of disclosed and undisclosed deals of 2017
with announcement date, funding stage, fintechs and investors.
Table 4.1: List of Indonesian Fintech Investments in 2017
Startup Stage Announcement Value (US$) Investor
Espay/Unik Acquired 1-Jan-17 Undisclosed EMTEK
Cermati Series A Ext 2-Feb-17 Undisclosed Orange Growth

Capital
Akseleran Seed Feb-17 Undisclosed Angel Investor
Amartha Series A 3-Mar-17 $2m MCI, Lynx Asia

Partners, Beenext,
Midplaza Holdig
C88/CekAja 11-Mar-17 Undisclosed Kickstart Ventures,

Socrates Capital
Kudo Acquired 3-Apr-17 $80–100m Grab
Ayopop Seed 4-Apr-17 $1m Gree Ventures
Bareksa Seed 6-Apr-17 Undisclosed Gernilang Dana

Sentosa
Gandeng Tangan 7-Apr-17 Undisclosed Mariko Asmara,

ANGIN
M-Cash 20-Apr-17 Undisclosed Kresna Graha

Investma
Table 4.1 (continued)
Startup Stage Announcement Value (US$) Investor
Tatalite 12-May-17 $6.3m SBI Group Japan
Akulaku Series B Jun-17 Undisclosed Legend Capital,

Shunwei Capital,
Qiming Venture
Partner
Kioson 20-Jun-17 $450k Mitra Komunikasi

Nusantara
Pasar Dana 4-Jul-17 $50m Itochu

Pinjarman
Jukir Acquired 6-Jul-17 Undisclosed Walezz
Julo Seed 19-Jul-17 Undisclosed East Ventures,

Skystar Capital,
Convergence
Ventures
PayAccess Series A Jul-17 Undisclosed Undisclosed
Artawana Pre-seed 4-Aug-17 Undisclosed East Ventures
UangTeman Series A 7-Aug-17 $12m K2 Venture Capital,

Darper Associ-
ates, STI Financial
Group, Alpha JWC
Payfazz 8-Aug-17 Undisclosed Y Combinator, MDI

Ventures
Kredivo Series A 4-Oct-17 Undisclosed Jungle Ventures,

NSI Ventures
Kioson IPO 5-Oct-17
Pendanaan Series A 31-Oct-17 Undisclosed Legend Capital
M Cash IPO 1-Nov-17
OnlinePajak Series A 9-Nov-17 $3.5m Alpha JWC Ven-

tures, Sequoia
Capital
Bitcoin.co.id 23-Nov-17 Undisclosed East Ventures
Source: Daily Social, 2017, Indonesian FinTech Report.

The growth in numbers of players in the Indonesian fintech space is remarkable.

There were only 50 fintech companies identified in 2015, which has now exceeded
165 fintech companies in Indonesia (Christian König, 2018). The segment of
digital payments (38%) is ranked as a top fintech segment followed by lending
(31%), personal finance (8%), and so on (Fong, 2018).
Indonesian fintech is mainly regulated by two main regulatory authorities,
Bank Indonesia (Central Bank) and Otoritas Jasa Keuangan (OJK or Financial Ser-
vices Authority). The Bank Indonesia has established a Bank Indonesia fintech
office and also launch a fintech regulatory sandbox with the aim of provision of
innovation friendly environment to the new entrants that can test their new busi-
ness models and products in a controlled environment. The OJK also introduced
new regulations for peer-to-peer lending and for electronic money.
In Indonesia, the fintech sector can play a significant role in promoting finan-
cial inclusion by reaching out to the tech savvy but unbanked population. Users,
regardless of gender, race or religion, can benefit from improved access to stream-
lined financial services. Amid all of the advantages and opportunities available,
Indonesia can effectively capitalize on them through smart regulations, while
creating interoperability among financial institutions and open collaboration
with young fintech companies to develop new partnerships and strengthen the
overall financial and economic position of a country that will be the fifth largest
economy by 2030.12
Republic of Turkey (Istanbul)
Turkey has some unique demographic features with a population under 25 (41%),
highest mobile penetration (95%), growing rate of internet users (67%) and also
remarkable adult literacy rates (95%). Turkey has made exceptional growth in
mobile banking and mobile payment transaction. In online retail, Turkey has also
outperformed Spain, Germany, and the United States in digital payment transac-
tions share during 2016 (BKM, 2017).
Turkey embarked its fintech journey in 2012, where the fintech sector has
since grown at an exponential rate (see Figure 4.10). The local Turkish banks also
invested in fintech companies. The amount of fintech investment in Turkey was
recorded as US$4.6m in 2012, which grew by 175% in 2016 and the value of fintech
investments hit US$29m.
12 http://uk.businessinsider.com/ranked-pwc-predicts-the-most-powerful-economies-
in-2030-2017-2/
INVESTMENT VALUE ($MILLION) 35
30
25
20
15
10
0
2012 2013 2014 2015 2016
YEARS
Source: Modified from FinTech Istanbul & BKM (2016).
Figure 4.10: Fintech Investments in Turkey (2012–2016)
The size of the overall fintech market in Turkey encompasses more than 200
fintech companies and start-ups. The digital payment segment is at the top among
all the fintech segments as 72 fintechs make up this category.
In 2016, the formation of fintech Istanbul through the support of Turkish
regulatory authority Interbank Card Center (Bankalararasi Kart Merkezi, BKM),
opened the Turkish fintech ecosystem to the world of international players—
establishing partnerships with six international organizations, namely Inno-
vate Finance, Level 39, Global FinTech Hubs Federation, Swiss FinTech, Holland
FinTech and FinTech Headquarters (FinTech Istanbul & BKM, 2016).
Turkey has great potential in making Istanbul a hub of fintech. The Turkish
government has launched the Istanbul Financial Center initiative with the aim of
making Istanbul a global financial leader by 2023. The Turkish government also
announced the formation of a Finance Technopark in Istanbul with the coopera-
tion of a Turkish exchange and a leading university. The interoperability, cooper-
ation and coordination among Turkish government regulatory bodies, incumbent
banks and fintech start-ups is an important element that will vindicate its posi-
tion in the global arena.
Sultanate of Brunei (Brunei Darussalam)
Brunei is one of the unassuming countries in Southeast Asia that has joined the
fintech race. The tiny nation, one of two Islamic sultanates left in the world, is
looking to develop its own fintech sector amid strong neighbors like Singapore,
Malaysia and Hong Kong, who are traditional financial hubs, due to its commit-
ment to Islamic values and the Shariah.
In November 2016, Brunei vowed to build a strong economy based on the
principles of Islam, and the government of Brunei Darussalam has made an agree-
ment with South Korea to work on the development of Islamic financial technolo-
gies. The Brunei government made this agreement for the deployment of new and
advanced technologies for the development of Islamic finance and has allocated
B$2 million for this. The demonstration of this first step was seen in the form of
a seminar entitled “Exploring Islamic FinTech Seminar” organized by the Energy
and Industry Department at the Prime Minister’s Office (EIDPMO) in partnership
with the Embassy of the Republic of Korea. In this seminar authoritative represen-
tatives of both countries expressed their views about developing Islamic fintech
sector in Brunei Darussalam through cooperation in terms of skills, advanced
technologies and expertise in Islamic finance industry. Both countries felt that
Islamic fintech is a good example of where we can find avenues for international
collaboration and investment to create and generate capital, spinoffs in the local
market for employment opportunities and, ultimately, diversify and boost their
respective economies (Norjidi, 2016). This also signals Brunei’s vision of diversifi-
cation of economic pathways from just the oil and gas sector.
United Arab Emirates (Dubai)
The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market
(ADGM) took its first step toward fintech development by publishing a consul-
tation paper for a proposed “Regulatory Laboratory” (RegLab) on May 10, 2016.
This was a very exclusive framework, which allowed the new entrants who want
to deploy innovative and new technology into financial services sectors (particu-
larly named as fintech participants) to test their activities in a cost effective and
controlled environment.
Under the framework of the RegLab, fintech participants have up to two years
for testing and experimenting with their products within the sandbox environ-
ment, where throughout this period the participants have not had to submit a
regular progress report to the FSRA. At the end of the testing period, viable busi-
ness models will get the final authorization and approval for the full-launch of
the business model to the market. Failing to fulfill the authorization criteria will
exclude the applicants from the framework of the RegLab (ADGM, 2016). Since
the establishment of the ADMG RegLab in May 2017, five fintech participants from
total of 11 applicants have been approved:
1. CapitalWorld, primarily based in India, is a one-stop digital platform that

automates the entire loan value chain from application to credit appraisal
and post-disbursement credit monitoring. They remove the traditional hin-
drances of the process, like having to physically visit bank branches to apply
for a loan. CapitalWorld completes the whole process online and they match
the loan seeker with their partner bank. Banks disburse the loan once the
applicant matches the risk appetite and other criteria set by the disbursing
lender.
2. Finalytix is a U.S.-based robo-advisory platform for wealth management
applications that seeks to help clients optimize their holdings, mitigate risks
and costs, and identify new investment opportunities.
3. NOW Money based in UAE, which offers mobile technology to permit low
income migrant workers in the UAE to access banking and remittance ser-
vices, otherwise out of reach. Users get direct access to an account, debit
card and remittance capabilities from a smartphone app and support from
a service center.
4. Rubique is an India-based online platform that links banks and fund seekers/
borrowers through a smart online financing process that connects to a range
of loan, credit card, and financing options that helps to fill the gap between
lenders and borrowers.
5. Titanium Escrow is a UAE-based automated escrow service that enhances
trust in counterparties and stabilizes the cash-flows of small businesses.
Since 2017, more fintech participants have been selected from over twenty appli-
cations from multiple countries. Among the newly selected participants, four are
blockchain firms, namely UK-based EquiChain, Hong Kong-based OKLink, UAE-
based Pyppl, and a Canadian firm, Remitr (CNBC.com, 2017).
United Kingdom (London)
Although the UK is not an Islamic country, London is one of the world’s biggest
and largest centers for international financial institutions having headquarter of
251 foreign banks and 588 foreign quoted companies with deep aspirations to be
an Islamic finance hub. Hence, we have included it in our list of countries as their
initiatives will significantly impact the growth of the Islamic digital economy,
particularly in Europe.
The UK is the global leader in the cross-border lending and the second center
for asset under management after the United States (EY, 2014). The availability of
highly skilled financial and tech talent, well developed world class technology
and financial services infrastructure, a market that is open to innovation, access

to capital, mercantile and welcoming culture for international financial institu-
tions, and innovation friendly regulatory approach are the drivers that maintain
its position as a global leader of banking and finance centered in London.
The factors that lead the emergence and development of the fintech eco-
system in the UK are super digital connectivity, the trust loss after the financial
crisis and introduction of new regulations by the UK government. The UK has the
highest level of smartphone and internet penetration globally and is also ranked
as a leader in offering financial services online. The economic crisis of 2008 had
plummeted the customers’ sentiments and they started to adopt new products
offered by the new entrants. Meanwhile, financial institutions also seemed to
fail in showing the adaptation and agility regarding technology and innovation.
Finally, this financial crisis forced the regulators to monitor and supervise the
banks’ activities more rigorously. The UK regulators took the dynamic and open-
minded approach and introduced new regulations while providing for opportuni-
ties to new entrants and companies to capitalize on their innovative products and
new business models. These changes and drivers in the UK market have made
London the hub of fintech for Islamic finance in Europe.
The investments in London-based fintech start-ups hit £800 million in 2017,
showing a double-digit growth as compared to 2016 (Knight, 2018). The total
funding attracted by the UK fintech start-ups in 2017 is valued at US$1.34 billion
(London & Partners, 2018). Among the top ten European fintech deals in the last
quarter of 2017, there were seven deals linked with London-based fintech com-
panies. Those are TrayPort (US$726.5m), TransferWise (US$280m), TradeTech
Alpha (US$150m), Just Giving (US$127m), Monzo (US$93.8m), Salary Finance
(US$52.8m), and WorldRemit (US$40m). Out of these seven fintech startups, five
were included in the top fifty hottest European fintech start-ups (KPMG 2018).
In March 2018, the UK Government Fintech Strategy announced that the gov-
ernment is going to make a new “fintech bridge” with Australia and a £7.5 billion
public-private fintech investment fund allocated for this purpose (Knight, 2018).
These steps were unveiled to uphold London’s position as a global hub and leader
of fintech. The investments and close alignment and connection between regu-
lators and Islamic finance industry in UK is leading to great developments. This
shows the aim of the UK government to ensure that London remain the hub of
Islamic fintech in the world.
Impediments for Islamic Fintech
We know that innovation is a key foundational aspect in the development of

Islamic finance in the digital economy. Fintech has the potential to play a major
role, primarily to improve processes and cost effectiveness while maintaining
strict Shariah compliance for the benefit of the industry. FinTech is necessary for
Islamic finance to maintain and grow its market share—a failure to keep pace
would weaken the players’ competitiveness. What then impedes the adoption of
Islamic fintech by Islamic financial institutions?
The principal challenge is still the regulatory environment, which is con-
stantly evolving. A good example is the highly evolving nature of the Initial Coin
Offering (ICO) market. The Islamic finance industry already has a lot on its plate,
be it standardization, developing regulation and innovating new products. Reg-
ulatory limitations and concerns could hinder the ability of Islamic finance insti-
tutions to forge ahead in adopting new models linked to various fintech themes
such as decentralization and privacy. Another factor is that fintech has its sig-
nificant cost and integration requirements before any economic benefit can be
derived. This could push fintech to the backburner, as resources may be limited
to work on disruptive initiatives within the company.
Impediments to change and its challenges are a part and parcel of any indus-
try and organization in any sector. It requires significant mindset and organiza-
tional realignment, and sufficient resources to support it. In the end, the even-
tual winner is the one who is able to tackle those challenges with the appropriate
strategy, plan, and change management.
In order to balance the use of new technology to provide better services while
controlling new operational risks, the Islamic fintech industry may overcome
such challenges through:
1. Regulatory support: The financial industry is considered one of the most reg-
ulated industries. To foster the environment of innovation and entrepreneur-
ship, supportive regulations and policies having great importance.
2. Financial support: There are a large number of companies and firms that
finance conventional fintech platforms at seed, angel and venture levels. But,
for Islamic fintech platforms, opportunities of financing are not enough and
its very hectic as well.
3. Shariah compliance: This is the top priority for Islamic fintech and its basic
element, which makes them Islamic. Shariah advisory scholars now need to
be adept with the underlying technology, which drives digital Shariah solu-
tions to adequately assess Shariah compliance. These Shariah scholars also
need to be versed in economics and finance to make sound decisions and
Impediments for Islamic Fintech 107
would require future scholars to be multidisciplinary, just like their predeces-

sors in the past Golden Age of Islam.
4. Agility and adaptation: Agility and adaptation is very important in the
fast-changing technology world. Without agility and adaptation, Islamic
fintech can not compete with its conventional counterpart in an industry
where virtually every segment is being reimagined.
5. Entrepreneurial courage and persistence: This is intuitively essential,
although it is not widely discussed in traditional financial literature. Any
entrepreneurial endeavor requires immense courage and persistence. The
Islamic world needs its young people to have these qualities and develop
entrepreneurial efforts to overcome the challenges of the future of Islamic
finance.
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Chapter 5
Blockchain and the Digital Economy
Introduction
Over the last decade, disruptive innovation in financial services has emerged from
financial technology (fintech) start-ups. These new firms have been quicker than
banks to take advantage of advances in digital technology, developing banking
products that are more user-friendly, cost less to deliver, and are optimized for
digital channels.
This relative success is unsurprising. These new players are less burdened
by the demands of regulatory compliance which banks are subject to. They are
unencumbered by complex and costly to maintain legacy systems. They can focus
on creating single-purpose solutions, designed to offer an improved experience
within just one product or service. They are more in tune with the peer-to-peer
(P2P) culture engendered by the explosion of social media. And they are smaller
organizations, designed for innovation.
Confidence in fintech has accelerated venture capital (VC) financing in the
industry to a record level of US$27.4 billion in 2017—a growth of 18% from 2016.
According to a recent report from consulting firm Accenture, the growth in fintech
investment has been driven by a surge in deal value in the United States, UK, and
India.
In the United States, the value of VC investment deals jumped 31% to US$11.3
billion in 2017. Meanwhile, in the UK, deal values almost quadrupled to US$3.4
billion, while India saw a near quintupling of investment to US$2.4 billion in 2017.
The volume of global fintech deals also rose greatly, from about 1,800 in 2016
to almost 2,700 in 2017 as shown in Figure 5.1. Much of the growth, particularly
in the United States and UK, has been driven by big new investment flows from
China, Russia, the Middle East, and other emerging economies. Figure 5.2 shows
the capital investment by fintech segments between 2010 and 2017.
DOI 10.1515/9781547400966-005
112 Chapter 5: Blockchain and the Digital Economy
Source: consultancy.uk https://www.consultancy.uk/news/16707/venture-capital-investment-
in-fintech-reaches-record-274-billion-high
Figure 5.1: Venture Capital Flows into Fintech by Region
Source: consultancy.uk
Figure 5.2: Venture Capital Investment by Segment
Introduction 113
Investments in Blockchain
Major firms across the financial services landscape have made investments in
blockchain-based start-ups, continuing into 2018. The herd of new strategic
investors is playing an increasingly important role in the health of the financ-
ing market for these start-ups. While quarterly deal activity dropped to its lowest
point since Q2’14 in Q4’16, the quarter’s top two financing deals featured invest-
ments by major corporate and financial services players.
More specifically, distributed ledger developer Axoni saw Wells Fargo
lead its US$18M Series A offering, which included JP Morgan, Goldman Sachs,
F-Prime Capital, and Thomson Reuters as investors. As Axoni CEO Greg Schvey
said, “Deploying distributed ledger technology in production at this scale is a
watershed moment for the industry. The combination of technology and business
expertise being contributed to this project from across the participating firms is
unparalleled and the benefits are clear.”1 Among the financial services investors
are insurance providers such as TransAmerica, New York Life, and Mitsui Sumi-
tomo Insurance Group (MSIG); payments giants including Visa, MasterCard, and
American Express; as well as banks like Mitsubishi UFJ Financial Group (MUFG),
Citi, Santander, and Canadian Imperial Bank of Commerce (CIBC).
Strategic investment into bitcoin or blockchain start-ups over the past three
years hit its apex in the fall of 2015 and into the winter of 2016. In recent months,
Deloitte, Miami International Holdings (MIAX), and Credit China placed their
first blockchain bets, with Deloitte taking a corporate minority stake in appropri-
ately named blockchain settlement and payments platform SETL.2 In total, over
fifty financial services firms or their strategic investment arms have invested in a
bitcoin or blockchain-specific start-ups since the start of 2014.
Of note, a relatively small number of start-ups have captured most financial
services investments in the bitcoin and blockchain space. For example, the seven
firms listed below—Circle Internet Financial, Coinbase, Ripple, BitFury Group,
Blockstream, Digital Asset Holdings, and Chain—have received nearly US$625M
in funding and are all listed among the top ten most well-funded bitcoin and
blockchain companies. Between Circle’s Series E round of US$110 million, US$118
million raised by Orbs, a purported “consumer-ready blockchain” service, US$75
million Series B round for Paris-based secure hardware wallet-maker Ledger, they
account for a significant number of financial services investors. As of the first half
1 http://www.dtcc.com/news/2017/january/09/dtcc-selects-ibm-axoni-and-r3-to-develop-dtccs-
distributed-ledger-solution
2 https://www.cbinsights.com/research/financial-services-corporate-blockchain-investments/
of 2018, the total investments in blockchain-related companies have exceeded

US$1.3 billion across all investment rounds worldwide. Reported dollar volume
invested in VC rounds raised by blockchain companies surpassed totals in 2017.
Trends of the Sharing Economy and the Internet of Things Era
Many people in the financial industry are trying to prepare for or predict what
the financial services sector will look like in 2020. Will artificial intelligence (AI)
replace operations? Will performing financial functions occur in an instanta-
neous manner from the palm of our hands? Will there be enough disruption so
that large banks will no longer exist? The following principles are not just our
forecasts for the future, but are widely shared.
Open Platforms
Most platforms already built or being built are installed or web-based, but few
have been completely open. Most very successful companies are completely
obsessive about keeping the system closed. In most cases, this worked very well.
However, the current trend is to open, and for good reason. Recently, Google,
which had frantically protected its search algorithms, opened its AI algorithms
for everyone to see and interact with. And perhaps even more astonishing was
Microsoft’s purchase of open source leader, GitHub.
We can project the open system materializing in two related areas: first, new
platforms can be built with proven open sourced financial services-oriented soft-
ware. Examples include databases a company uses, such as Hadoop, PostgreSQL,
and MongoDB. Second, open API (application programming interface) systems
can be an enabler. Open APIs provide future flexibility as well as the ability to
have other noninfluenced voices providing continuous feedback to suggest new
ways to approach a problem. An open API also allows third-party vendors to build
additional features and enhancements without getting stuck in the company’s
resource constrained pipeline and prioritizations.
An open system fits perfectly into the overarching need for transparency in
the financial markets system, and more transparency will lead to better product
and cost control. However, the main problem with an open system is information
leakage. How do you have a fully open system to increase transparency and at the
same time make sure the amount of information leakage is minimal? How do you
financially capitalize on your investment in your API? The solutions to these two
questions will be the fine art that will need to be mastered by tomorrow’s industry
leaders.
Introduction 115
Web and Mobile (Internet of Things Devices)

There have been many iterations of web-based front-end technologies, from Mic-
rosoft’s Silverlight to Adobe’s Flash, yet they are fading into the history halls of
technologies. The Web and HTML 5 are here to stay.
The advent of financial markets-specific containers such as Openfin, which
create ease of integration among platforms and institutions by making an appli-
cation native to any screen, allows the transformation to mobile to be extremely
easy. The more institutions standardize on the usage of these infrastructures, the
easier application deployment and integration will be.
Open sourced efforts in this space are impressive, but only if they lead to
further standardization of front-end development. As for mobile, it is easy to say
a platform will be mobile, but it is harder to execute transitioning to mobile if
all features of an application must be made mobile. Having the luxury to build a
mobile strategy from scratch is rare.
Looking at certain areas in the world, such as parts of Africa and China, the
desktop model has been completely bypassed. Hence, the importance of offering
the consumer full capabilities using a mobile platform. For the average finan-
cial services executive on the street, mobile means more frequent and immediate
transparency. The ability to know about an issue in real time and solve that issue
on a mobile platform is key for future potential users.
Cloud-Based (Internet of Things Infrastructure)

Public clouds, private clouds, cloud as a disaster recovery (DR), and cloud com-
munications are here to stay and will increase as the adoption of cloud-based
computing accelerates. All companies, regardless of size, should build with a
cloud-based infrastructure in mind, and seriously consider a server-less environ-
ment with adequate cybersecurity measures.
Banks are very concerned about security, and the safety to store their sensi-
tive information in the cloud. It should be noted that most of the high-visibility
hacks in the past ten years have affected networks but fewer on cloud providers.
It is much easier to protect small amounts of connection points than it is to guard
large amounts of entry points coming into a system. Financial institutions need
to find ways to mitigate security fears on the path to future computing, which
appears to be in the cloud.
Cloud computing also serves as an opportunity to consolidate platforms and
connectivity. However, it is the role of vendors to provide further efficiencies
using cloud computing rather than financial institutions believing that if they
simply move everything to the cloud, their processes would be cheaper and easier
to maintain.
Moving operations fully to the cloud will be akin to disconnecting from cable
and going wireless, but it needs to have a justified use case and may not neces-
sarily make sense for every business. Some cloud services’ pricing is flexible in
that they charge by the number of minutes used on the platform. This is very
encouraging and innovative, as making an upfront commitment for usage is a
burden on cashflows and no longer necessary. Such technological shifts allow the
financial institutions to focus on their core business areas which are managing
balance sheets, providing credits and financing, trading, and risk management
while using whatever tools they have at their disposal to provide mobility and
maintaining competitive advantage in their space.
Clearing Trades and Settlement Transactions

A recent poll showed that 60% of participants believe that further digitization
and clearing of the over-the-counter (OTC) world is certain. The recent numbers
published by the largest clearing houses support this migration mainly due
to crippling regulatory burdens of keeping larger amounts of capital for OTC
trades. There are many factors working against full migration of OTC products
to standardized clearable products. Some include the basic fact that there is no
single model to price these products. Therefore, disagreements on the amount of
required collateral prevents the full migration into clearing.
Another obstacle is that banks do not want to create too much transparency
in these products, as they provide the bank with huge margins on trading in the
current opaque market. Some financial institutions have created direct links to
clearing houses and other advancements in the cleared processing of trades. New
regulation around trades requires immediate processing activity on these prod-
ucts, and some regulations require full reporting within 10 minutes.
However, what is obviously being missed is that even in the cleared space,
50% or more of the transactions are still voice trades made over the phone. If we
do not fully automate that part of the cleared trade process, we will not achieve
the full compliance needed to create the efficiencies predicted by many.
Therefore, automation of the voice trade is key to the advancement of trade
processing. We expect technologies in this space to rapidly advance. However,
98% accuracy is simply not enough in this use case. We need to be right all the
time when it comes to sensitive information. By 2020, this concern will be likely
addressed, and we will reach full automation of the trading process from an OTC
digitization standpoint as well as from the voice trade perspective.
Introduction 117
Widespread Use of Artificial Intelligence

If you are a vendor or start-up and want to be funded, unless you can come up
with a better idea, you will need to explain how your platform will use either AI,
cognitive components such as chat bots, or behavioral-based insurance under-
writing, and of course you must explain how you could use blockchain in your
future vision.
The short-term prediction is that AI, cognitive platforms, and blockchain will
all be a major part of any meaningful solution going forward. With the explosion
of big data, AI technologies are key to understanding and improving the use of
this big data. AI has advanced at a rapid pace and will integrate into our daily
lives, often unseen, by 2020.3 For example, we see the use of AI in our platform as
a means to achieve two major goals: data quality, and trade breaks reconciliation
and remediation. All of the catalysts for increased data usage are clear, but the
biggest problem is the quality of the data itself. If the quality of the data coming
in is poor, then you will also have poor output—quality of output is highly depen-
dent on the quality of input.
The Holy Grail in terms of our platform’s goals is to improve data quality,
improve data matching of nonstructured data, and help our AI algorithms correct
data impurities on their own. We have seen an explosion in the interest around
blockchain and the way it could simplify the complexities of the market infra-
structure.
Blockchain would drastically reduce costs while improving the ability of
financial institutions to synchronize data and transactions. Some experts believe
the way to prepare for it is by installing a private node distributed ledger and then
preparing to expose it to other players if and when they are ready. Herein lies the
main problem with the implementation of blockchain—it will only work if all the
participants implement the technology until effective solutions to this problem
are found. To reach this network effect or its true scale potential, one factor that
is very important is the ability to define the right use case for the technology.
A main concern today is that institutions are not very selective in the choice
of use case when implementing AI or blockchain. This dilutes the importance
of the technology and sometimes leads to large investments in solutions being
disbanded mid-way. If we are selective in our use cases, and are choosing the
right technology partner, we should have full verification of the success of such
3 Fintech AI Revenue to Grow 960% by 2021, Driven by Big Data, Distributed Computing & Con-
nectivity. Juniper-Research, August 2, 2016. https://www.juniperresearch.com/press/press-re-
leases/fintech-ai-revenue-to-grow-960-by-2021-driven-by
technologies in the early 2020s, which will set clear key performance indicators
toward the implementation of these technologies.
Regulatory Controls
If we could all agree on one area that controls the narrative of the financial insti-
tution business model and its future viability, it would be the immense amount of
new regulations controlling investment capital in the market for the past decade.
Complying with the regulations became costly in the global arena. If you were
local and thought you could escape the reach of the regulators, you were wrong.
Furthermore, the regulatory attitude toward financial market participants was do
or die, leaving no choice or time to think about future strategies.
One of the main criticisms is that most regulators were interested in collect-
ing large fees for noncompliance issues rather than working to reduce systematic
risk. New technology was patched on like band-aids put on an open wound.
Although some efforts are on the way for deregulation in the United States,
many new regulations and even tighter frameworks were approved in the Euro-
pean Union. It is likely that we will continue to suffer higher level of regulations
globally, which will distract us from the strategic views of our institutions. It will
be interesting to see how regulators from less developed nations follow advanced
nations to add further regulatory burdens on fintech companies.
Managing global compliance with these regulations and adjusting the finan-
cial institutions’ systems to be flexible enough to deal with the newest breed of
regulation is not the best way to approach this issue strategically. Utilities could
provide a meaningful stepping stone for further compliance with the ever-chang-
ing regulatory environment.
Institutional Investment
The paradigm of the separation of buy-side (institutional investors) functions and
sell-side (investment banking industry) functions is rapidly changing. Functions
such as market making or direct clearing were not considered a real threat to the
sell-side model until recently. This trend will continue to grow and therefore we
believe that by 2020, at least one or two large buy-side firms will decide to enter
the market making business (e.g., Citadel Securities) and direct clearing.
What this means from a technology platform perspective is that the full auto-
mation of workflows that were once deemed to be impossible to automate are
now possible. Buy-side firms have no interest in becoming banks, as they are
always at the forefront of creativity in financial instruments and, most important,
they have the power of the user. When building our platform, we are constantly
reaching out to innovative institutional investors to get their input on product
Introduction 119
development. If there is one major risk to the banks’ future business model, it is
the evolution of the buy-side model.
Conversely, institutional investors have benefited from the fact that invest-
ment banks pay for most of the costs involving clearing, processing, and even
trading securities. Furthermore, institutional investors are used to the banks per-
forming functions on their behalf, such as reporting. These functions will not be
handled by the banks beyond 2020; therefore, the flip side of buy-side dominance
is the extra expense in technology and resources to comply with this new level
of importance. The positive aspect is that institutional investors, especially the
nimbler hedge fund industry, tend to think about problems with no legacy bias,
and are thus part of creating new and improved workflows to deal with the new
financial responsibilities.
Diverse and Choices

To get where we want to be in the fintech future, we will have to continue the
simple function of mobility. Competition is good for the market and we believe
that we are in an era when it will only increase, offering a diverse competitive
landscape for fintech but raising other issues. One issue is currently very appar-
ent in many parts of the industry, where there are at least six to ten choices of
vendors for one problem. Blockchain, advanced AI algorithms, and payment plat-
forms are just some examples of this proliferation.
If we provide the ecosystem in which many participants can easily integrate
their services, then financial institutions would be able to “try out” any service
they would like with minimal technological effort. Frequency of usage and new
functionality would often be deployed in a seamless way to market participants.
Take the Amazon or iTunes models, for example. Apps come and go, succeed
and fail, but the user never needs to spend more time or effort on them beyond
a simple download or small fee. The other important factor to reaching diver-
sity and choice is that you do not want the framework that gets you the ability
to choose to be just another toll taker on the way to a perfect environment. The
commercial business model of participants and vendors needs to change and this
should happen over the next five years.
User Defined and User Experience

We have seen too many systems and technologies created by the financial indus-
try that seem to have thought about the use case and the technology needed to
achieve its goals, but at the same time neglected the user experience (UX). When
the UX is poor, eventually the user will look for another alternative. Looking at
the current technological offerings, some of the major platforms that support the
market infrastructure are simply terrible to use, as an average function might take
a long list of manual steps to complete. There is a shift in power that is moving
to the users, and vendors should assign UX a much higher importance, as it does
other features. Basically, behind the traders that make money sit great people
who have had to deal with inferior and cumbersome UXs.
Financial institutions rarely make that experience better unless they think
it will directly affect their bottom-lines. However, by 2020, most institutions will
address this issue; otherwise their competitors will do so and benefit with an
increased market share because of it. Another important part of improvement to
UX is the clear definition and support for user rights. Users are looking for clear
rights and a flexible method to add or take away from entitlements and user pref-
erences. Letting the user define his own trade matching algorithms is one way we
are addressing this issue for 2020.
Trust in the New Sharing Economy
As Adam Smith, the father of modern economics, pointed out, a base level of trust
in society is necessary for specialization and the economic growth that accom-
panies it. If we did not trust the butcher to give us quality meat without having
to inspect the cow every time—or worse yet, if we needed to litigate after every
grocery run—the whole system would come to a screeching halt.
This concept is even more critical in the sharing economy—which is often,
quite appropriately, referred to as the trust economy. The sharing economy
requires an incredibly high degree of trust, often based off little more than a
profile picture and rudimentary reputation system. Sharing saves people time,
money, and aggravation. But what really greases the wheels of this fast-growing
economy is trust; it is what allows someone to take a ride from a stranger or rent
a room in a house from someone they have never met. These successes in the
sharing economy startled more than a few cynics who assumed that this reliance
on trust, reputation, and goodwill would quickly become a giant scam or worse.
The sharing economy matches under-utilized assets with potential users.
Uber and Airbnb have transformed idle assets (inventory) into economic value—
by drastically changing social behavior and replacing transaction costs in order
to match users with the assets. In the sharing economy, people must become
comfortable enough trusting others that they will forego the expense of takaful
contracts, lawyers, security systems, and even private ownership enforcement,
to enjoy the benefits of sharing assets. The global population has become
entrenched in the dominant ownership mindset. People are wading through an
asset-heavy lifestyle engineered by the rise of hyper-consumption with material
Trust in the New Sharing Economy 121
possessions, most of which are not really wanted, needed, or even used. While
established businesses continue to hammer consumers with various iterations of
the same proven formula—create product, sell it, collect money, repeat—a new,
grassroots model of doing business is emerging, providing consumers with the
power to get what they want and need at less personal and environmental cost
(Gansky 2010).
As advanced trust mechanisms develop, the first “transaction costs” to disap-

pear will be the redundant ownership of assets. As the mechanisms develop
further, other opportunities will arise. Airbnb and asset rental companies are, in
many ways, still working off the paradigm of scale economies, the low-hanging
economic fruit of our time. Trust metrics will offer even greater economic value
down the road, when massive economic gains can be reaped by applying them
to things like:
– Releasing business value trapped in excess capacity and unnecessary trans-
action costs
– Altering traits of reliability and integrity to deliver on a commitment
– Collaborate to make trust data more viable and widespread
At the same time, the sharing economy represents a significant and growing busi-
ness opportunity that will play a much grander fundamental shift in economic
transactions. It is a shift from an infrastructure that protects people from each
other, to an infrastructure that helps people trust each other.
Trust and Reciprocity in the Economy
Institutional economists, economic sociologists, political economists, and others

concerned with the social organization of economic life have long maintained
that trust and confidence are crucial to effective economic functioning, not only
in underwriting specific exchanges between particular agents, but in terms of a
generalized foundation of trust that underpins a wider socioeconomic system.
In instrumental terms, resources of trust promote economic efficiency by reduc-
ing the transaction costs of economic exchange, on the assumption that others
will behave according to common norms of economic conduct. It may be possible
to transact without such an underpinning of trust—in contexts where cheating,
fraud or corruption are rife—but the risks and associated costs of doing so are
much higher than where individuals have a reasonable expectation that others
will deal plainly. Trust leads a double life as a social value and an economic
resource; as such, it is a critical concept for linking social arrangements with eco-
nomic outcomes.
As financial markets have grown more complex, and exchanges within them
made impersonal through electronic communications, the problem of trust has
become more acute. Systemic risk requires systemic trust, and the ways in which
risk has been distributed across the system via complicated and often opaque
instruments has tested systemic resources of trust to breaking-point. Tighter
credit requirements—inter-bank, business, and mortgage lending—are a signal
example of a crisis in confidence inside the financial system. The proliferation
of crowdfunding platforms, for example, seems to indicate the market seeking
alternative means to traditional lending.
It should also be noted that poor and tyrannical countries find themselves
entrapped in continuing mistrust, inequality, and dysfunctional institutions.
High levels of inequality contribute to lower levels of trust, which lessen the
political and societal support for the state to collect resources for launching and
implementing universal welfare programs in an uncorrupted and nondiscrimi-
natory way. Unequal societies find themselves trapped in a continuous cycle of
inequality, low trust in others and in government, policies that do little to reduce
the gap between the rich, and the poor and create a sense of equal opportunity.
Demands for radical redistribution, as we see in many transitioning countries,
exacerbate social tensions rather than relieving them.
However, we know that extending trust to people inspires them. It brings out
the best in them and it motivates them. In fact, the reason that extending trust is
so powerful is because trust is a compelling form of positive human motivation.
This is a key source of economic growth and collaboration. Extending trust also
in turn increases trust. It is somewhat ironic that one of the best ways to increase
trust is to simply extend it. Trusting people inspires them to want to be worthy of
that trust. It brings out the best in them. It makes it safer to risk and innovate, and
extending trust generates reciprocity. When we give trust to people, they tend to
give it back. There are many reasons for this, and the fundamental reason why
the sharing economy has succeeded so far is because its positive (and counter-in-
tuitive) outcome helps show that people are more trusting than skeptics usually
assume, especially when someone else goes out on that limb first. This helped
fuel much of the early optimism of a utopian trust economy where we could all
operate on a system of goodwill toward mankind. But when we withhold trust,
people generally will in return withhold it. In teams and organizations, giving
trust manifests in greater employee engagement and retention, increased cus-
tomer loyalty and referrals, and other economic benefits.
What Is Blockchain? 123
Trust and Trustworthiness (Reciprocity) in Islam
In Islam, man is entrusted with an amanah (trust) to establish responsibility on

earth by means of virtues and bounties endowed to him by God, his initiative, cre-
ativity, and labor (isti’mar). Nature has been created for human beings but man is
also required to establish a moral social order on earth. The concept of amanah
implies that in all his actions, man should choose to prosper the earth (islah) by
making the best use of resources and to fully utilize the virtues inherent in him
to isti’mar the earth. Ifsad (fasad) or adversity or corruption, is to be avoided in
managing one’s role as a khalifah. Being a khalifah, man has also been granted
authority to freely manage nature/universe and to cooperate with his fellow
beings to complete the task of khalifah. As our world and the economy evolves,
we seek new ways (innovate) to cope with the challenges evolution brings. We
believe technology is a great way to do this, and the main building block to enable
trust in impersonal financial transactions in a highly globalized environment can
be identified as blockchain. This innovation that will shape the future will not
only play a crucial role in boosting the financial sector (banking, takaful, invest-
ment, etc.) including the Islamic finance sector but also other economic transac-
tions that will characterize the sharing economy.
Religious tenets, in general, could be viewed as the force behind the “invisible
hand” that Adam Smith had probably alluded to, where in the pursuit of self-in-
terest, the “invisible hand” will safeguard the collective interest. There always
has been a moral and ethical obligation to pursuing one’s own interest because
we do not live in isolation. If we choose to ignore these obligations, the unspo-
ken social contract breaks down and it would lead to the tragedy of commons.
Building trust by upholding ethical and moral obligations, hence, reinforces
public civility and communal solidarity, removes fears and mistrust in public and
private institutions for a harmonious and profitable existence, by reducing risk
in highly uncertain times through shared goals and reciprocal undertaking. And
as we will see in the next few sections, specific technology, like blockchain, will
be a key enabler to further encourage this and play a significant role in the new
sharing economy.
What Is Blockchain?
Blockchain is a P2P public ledger maintained by a distributed network of com-

puters that requires no central authority or third-party intermediaries. It con-
sists of three key components: a transaction, a transaction record, and a system
that verifies and stores the transaction. The blocks are generated through open-
source software and record the information about when and in what sequence the
transaction took place. This “block” chronologically stores information of all the
transactions that have taken place in the chain, and therefore the name—block-
chain. In other words, a blockchain is a database of immutable time-stamped
information of every transaction in that chain that is replicated on servers across
the globe. This technology is the foundation of cryptocurrencies4 such as bitcoin.
In fact, blockchain technology was first introduced in 2009 with bitcoin, a cryp-
tocurrency-based distributed payment protocol.
Blockchain’s main innovation is a public transaction record of integrity
without central authority. The technology offers everyone the opportunity to par-
ticipate in secure contracts over time, with a secure record of what was agreed at
that time. This innovation carries a significance stretching far beyond cryptocur-
rency. Blockchain lets people who have no particular confidence in each other
collaborate without having to go through a neutral central authority. Simply put,
it is a mechanism for creating trust. Within this open ledger system, blockchain
offers an inherent level of trust for the user, eliminating the need for the middle-
man and mitigating the risk of human error. Its publicly accessible log of transac-
tions ensures that the data is protected against tampering and revision, and it is
virtually impossible for individuals to modify or replace parts of the blockchain
secretly.
A full copy of the blockchain contains every transaction ever executed,
making information on the value belonging to every active address (account)
accessible at any point in history. Every block contains a long reference number
or hash of the previous block, thus creating a chain of blocks from the genesis
block to the current block. Figure 5.3 illustrates how a transaction is recorded on
the blockchain, based on the cryptocurrency protocol.
4 Bitcoin and other cryptocurrencies (also called AltCoins) gained significant momentum in
2013 with bitcoin’s sharp price rise, the historic high being US$1124.76 on November 29, 2013.
High prices and high volatility attracted speculation, as well as proliferation of competitive and
complementary cryptocurrencies. Arguably, there were over 500 AltCoins based on blockchain
technology as of November 2014.
Source: http://saphanatutorial.com/introduction-to-blockchain-for-beginners/
Figure 5.3: How the Blockchain Transaction Works
Validation is required for a new block to be added on to the blockchain. This vali-
dation process, also called mining, allows pending transactions to be confirmed;
enforces a chronological order on the blockchain; protects the neutrality of the
blockchain; and enables different computers (or nodes) to agree on the state of
the system at any given time (Bitcoin Project, n.d.).
In traditional transactions, such as money transfers or foreign currency, there
is usually an intermediary or a centralized entity that records the transmission of
money or currency that exist apart from it. In blockchain, the token or digital coin
itself is what has value, which is determined by the market. This is what makes
the system a truly decentralized exchange. When people buy or sell bitcoins, a
secret key or token is broadcast to the system. “Miners” use nodes, computers, or
devices linked to a network, to identify and validate the transaction using copies
of all or some information of the blockchain, which are accessible publicly. Before
the transaction is accepted by the network, miners have to show PoW using a
cryptographic hash function (that special algorithm), which aims to provide high
levels of protection. Miners receive some form of compensation for their comput-
ing power contribution, avoiding the need to have a centralized system. New pro-
tocols such as Ripple rely on a consensus process that does not need miners nor
proof of work and can agree on the changes to the blockchain within seconds. As
progress is made in blockchain technology, its use will become more efficient and
applicable in many ways, that is, to transact anything of value, not just digitizing
currency.
Blockchain as Currency and Payments

Using blockchain as digital currency, like bitcoin, is a way of buying and selling
things over the internet without cash. The bitcoin value chain is composed of
several different constituencies: software developers, miners, exchanges, mer-
chant processing services, web wallet companies, and users/consumers. From an
individual user’s perspective, the important elements in transacting coins are a
user address, a private key, and wallet software. The address is where others can
send bitcoin to you, and the private key is the cryptographic secret by which you
can send bitcoin to others.
Until blockchain cryptography, digital cash was, like any other digital asset,
infinitely duplicable (like our ability to make copies of an e-mail attachment any
number of times), and there was no way to confirm that a certain batch of digital
cash had not already been spent without a central intermediary. There had to be a
trusted third party (whether a bank or quasi-bank payment platforms like PayPal)
in transactions, which kept a ledger confirming that each portion of digital
cash was spent only once; this is the double-spend problem. Coin ownership is
recorded in the public ledger and confirmed by cryptographic protocols and the
mining community. Blockchain is “trust-free” in the sense that a user does not
need to trust the other party in the transaction, or a central intermediary, but does
need to trust the system: the blockchain protocol software system. The “blocks”
in the chain are groups of transactions posted sequentially to the ledger—that is,
added to the “chain.” Blockchain ledgers can be inspected publicly with block
explorers, internet sites (e.g., www.Blockchain.info for the bitcoin blockchain)
where you can see a transaction stream by entering a blockchain address (a user’s
public-key address, e.g., 1BpXJCi5bEjNn6DtoYJhg6wR5JwLCGLbfx).
One of the main issues blockchain can tackle is the high complexity of pay-
ments networks, due to the fragmentation of the financial industry itself, which
makes it impractical for individual banks to deal directly with all other banks on
the planet.
For example, when a bank gets a payment instruction from a client, it needs
to find a correspondent bank that is willing to take the client’s funds and termi-
nate the payment locally at the receiving bank. And in order to do so, the corre-
spondent bank needs to have a nostro5 or vostro account with the receiving bank
(or with another correspondent bank that has access to the receiving bank, thus
adding an extra hoop), ideally with enough pre-funded liquidity to complete the
payment on the client’s behalf.
But when this happens, the receiving bank has no way to verify that the
incoming transfer from the (last) correspondent bank, in fact, corresponds to the
original client sending the money. That is why a SWIFT message from the sender
is needed, so the receiving bank can understand the purpose of the incoming
funds, do proper due diligence or antimoney laundering (AML) checks on the
payment, and inform the receiver of the funds.
All the parties involved have different ledgers, that is, they do not share a
single version of the truth, and the coordination between all these parties is
slow and error-prone, many times relying on manual interventions by back-of-
fice teams. Furthermore, someone needs to perform currency conversion at
either end, and different parties need to manage liquidity levels at nostro/vostro
accounts, which involves settling against central bank accounts as well.
One way that cryptocurrencies can provide efficiency is in international trade
invoicing and payments. Sourcing liquidity for local currency is a key factor to
make international supplier payments more reliable. The problem for importers
in emerging economies is that there are fewer buyers and sellers of local currency.
This results in fewer bids and asks, making it more difficult for buyers and sellers
of local currency to transact, hence, impacting on reliability of international sup-
plier payments and their participation in trade. It is plausible in this respect that
bitcoin the currency (BTC) could provide liquidity for local currencies and bitcoin
the system could act as a means to pay international supplier invoices in interna-
tional currencies.
For example, consider a scenario where an international supplier invoices
a firm in Kenya in US$ (Africa has been the fastest growing region in the last
decade—and the microfinancing service M-Pesa6 originated from Kenya). Tech-
nically, the local importer can purchase BTC with local currency (KES) on an
exchange that acts as an onramp—in 10 minutes the transaction is confirmed by
5 Nostro is a Latin word, which means “our.” When a bank holds an account in foreign curren-
cy in another bank it is called nostro account, that is, our account with them. Similarly, vostro
means “your,” that is, your account with us. Accounts of other banks in another bank (in domes-
tic currency) are known as vostro accounts.
6 M-Pesa was first launched by the Kenyan mobile network operator Safaricom, where Vodafone
is technically a minority shareholder (40%), in March 2007. M-Pesa quickly captured a signif-
icant market share for cash transfers, and grew to 17 million subscribers by December 2011 in
Kenya alone.
bitcoin, the system—and the BTC can be used to purchase US$ on the exchange,
where the balance is deposited into a bank account. Clearly this is technically
feasible, as this is indeed how current remittance flows on bitcoin work—and in
this example would avoid the high intermediation costs for converting the KES.
Blockchains as Databases and Public Registries
Blockchains also have a host of other uses because they meet the need for a
trustworthy record, something vital for transactions of every sort. One idea is to
develop tamper-proof public databases cheaply like land registries (Honduras)
and registry of companies (Isle of Man); or registers of the ownership of luxury
goods, like diamonds (Everledger) or works of art. Documents can be notarized
by embedding information about them into a public blockchain—and you will no
longer need a notary to vouch for them. Financial-services firms are contemplat-
ing using blockchains as a record of who owns what instead of having a series of
internal ledgers. A trusted private ledger removes the need for reconciling each
transaction with a counterparty; it is fast and it minimizes errors. Oliver Wyman,
Anthemis Group, and Santander Innoventures (2015), estimate that this could
save banks up to US$20 billion a year by 2022.7
Public records, too, can be migrated to the blockchain: land and property
titles, vehicle registrations, business licenses, marriage certificates, and death
certificates. Digital identity can be confirmed with the blockchain through
securely encoded driver’s licenses, identity cards, passports, and voter registra-
tions. Private records such as IOUs, loans, contracts, signatures, wills, and trusts
can be stored.
Physical asset keys can be encoded as digital assets on the blockchain for
controlled access to homes, hotel rooms, rental cars, and privately-owned or
shared-access automobiles (e.g., Getaround). Intangible assets (e.g., patents,
trademarks, copyrights, reservations, and domain names) can also be protected
and transferred via the blockchain. For example, to protect an idea, instead of
trade-marking it or patenting it, you could encode it to the blockchain and you
would have proof of a specific invention/innovation being registered with a spe-
cific date-time stamp for future proof.
7 This is quoted from their joint report “The Fintech 2.0 Paper: rebooting financial services.”
Blockchain as Smart Contracts
Whereas the initial blockchain version is for the decentralization of money

and payments, the next evolution of blockchain is for the decentralization of
markets, and the transfer of many other kinds of assets beyond currency using
blockchain, from the creation of a unit of value through every time it is trans-
ferred or divided. The key idea is that the decentralized transaction ledger
functionality of blockchain could be used to register, confirm, and transfer all
manner of contracts and property. Satoshi Nakamoto (2009) started by speci-
fying escrow transactions, bonded contracts, third-party arbitration, and mul-
tiparty signature transactions. All financial transactions could be reinvented
on the blockchain, including stock, private equity, crowdfunding instruments,
bonds, mutual funds, annuities, pensions, and all manner of financial instru-
ments (futures, options, currency swaps, etc.).
Smart contracts are a complex set of software codes with components
designed to automate execution and settlement of contractual agreements. In
other words, they are programmable contracts, which self-execute the stipula-
tions of an agreement when predetermined conditions are triggered. Once two
or more parties consent to all of the terms within the contract, they cryptograph-
ically sign the smart contract and deploy it to a distributed ledger. When a con-
dition specified in the code is met, the program automatically triggers a corre-
sponding action. By removing the need for direct human involvement, a deployed
smart contract on a distributed ledger could make contractual relationships more
efficient and economical with potentially fewer opportunities for error, misunder-
standing, delay or dispute. The smart contract is also automatable and enforce-
able. It is automatable by a computer or network of computers, although some
parts may require human input and control. It is then enforceable by either legal
enforcement of rights and obligations or tamper-proof execution.
In contractual agreements within the purview of the Shariah, it is imperative
that the clauses be transparent and void of deceptive ambiguity (gharar). Certain
“expensive” law firms charge a premium to be able to craft clauses such that in
cases of dispute, these clauses allow unfair advantage to them. If you really think
about it, smart contracts are meant to be “dumb” such that they ideally have no
hidden loop-holes and terms and conditions are plain enough to be executed
automatically by code. Such is the spirit of the Shariah.
In addition, reliance on physical documents leads to delays, inefficiencies
and increases exposure to errors and fraud. Financial intermediaries, while pro-
viding interoperability for the finance system and reducing risk, create unneces-
sary overhead costs and increase compliance requirements. Smart contracts on
blockchain have the capacity to inject greater efficiency and productivity while
saving costs associated with traditional contracts.
Blockchain as Clearing and Settlement of Securities Transactions
In their analysis, Boston Consulting Group (Evans et al., 2016) noted that one
of the most scrutinized uses of blockchain is for the clearing and settlement of
securities transactions, currently a complex network of brokers, custodian banks,
stock transfer agents, regulators, and depositories. A single transfer can require
a dozen intermediary transactions, and typically takes three days to settle, of
which about 20% generate errors, which has to be corrected manually.
With blockchain, two trading parties could read and write to a common,
trusted, and error-free database. The transaction could be written in legal lan-
guage as well as in computer code, so that the data exchange itself is the settle-
ment. And it could be visible to regulators. The brokers (as agents of the buyer and
seller) could trade on a larger blockchain to remove custodians as intermediaries,
thereby reducing total transaction costs. Institutions issuing securities, such as
corporations and municipalities, could issue them directly onto the blockchain,
thereby removing the need for stock transfer agents.
Reduction of Fraud
It is commonly acknowledged that one of the main challenges facing the banking
industry today is the growth of fraud and cyberattacks. Traditionally, bank
ledgers have been created within a centralized database. This model has been
more susceptible to hackers and cyberattacks as all the information is located in
one place—usually secured behind outdated legacy information technology (IT)
systems. Hackers and cybercriminals are well aware of evolving digital technol-
ogy and have been able to bypass these security systems to commit data breaches
and fraud.
In contrast, as blockchain is decentralized it is less prone to this type of fraud.
By using blockchain there would not only be real-time execution of payments but
also complete transparency, which would enable real-time fraud analysis and
prevention. A blockchain is checked at every step of a transaction by indepen-
dent miners, with all data being open and publicly available, there is a real-time
analysis and verification of every bit of data and all information during the trans-
action. The blockchain ledger can provide a historical record of all documents
shared and compliance activities undertaken for each banking customer. Mali-
cious attempts to view or change the data become part of the data itself, making
third-party hacks immediately obvious.
For example, this record could be used to provide evidence that a bank has
acted in accordance with the requirements placed upon it—should regulators ask
for such clarification. It would also be of particular use in identifying entities
attempting to create fraudulent histories. Subject to the provisions of data pro-
tection regulation, the data within it could even be analyzed by the banks to spot
irregularities or foul play—directly targeting criminal activity. This would be an
advantage over the current banking and payments systems, which are more sus-
ceptible to fraud and hacking. There would need to be collaboration to achieve
this within the blockchain ecosystem. Banks would need to partner with regula-
tors and fintech companies to develop credible, decentralized ledgers permitting
rapid adoption of global real-time payments and settlement.
On December 30, 2015, Nasdaq announced that it had made its first ever
share trade using blockchain technology. Nasdaq used its proprietary Linq plat-
form (developed in collaboration with Chain.com and global design firm IDEO) to
sell shares. As Nasdaq has pointed out, within the multistep manual process used
today in banks and financial institutions there is not only plenty of room for error
but also for fraud. By utilizing blockchain, organizations can reduce risk and
administrative burden, as well as saving time and money. Nevertheless, banks
must consider that blockchain does not yet eliminate all types of fraud.
Know Your Customer

Know Your Customer (KY”) requests currently can cause delays in banking trans-
actions, typically taking thirty to fifty days to complete to a satisfactory level.
Current KYC processes also entail substantial duplication of effort between banks
(and other third-party institutions). While annual compliance costs are high,
there are also large penalties for failing to follow KYC guidelines properly.
The average bank spends US$56 million a year on KYC compliance, according
to a recent Thomson Reuters survey, which also revealed that some banks spend
up to US$420 million annually on KYC compliance, AML checks and customer
due diligence (CDD). Since 2009, regulatory fines, particularly in the United
States, have followed an upward trend with record-breaking fines levied during
2015. Ongoing regulatory change, with no one internationally agreed standard,
makes it increasingly hard for banks to remain compliant. Thus, as it can take
such a long time to on-board a new customer because of lengthening KYC pro-
cedures, this is having an increasingly negative effect on customer experience.
A blockchain specialist at Rabobank proposed that KYC statements can be
stored on blockchain. Once a bank has KYC-ed a new customer they can then
put that statement, including a summary of the KYC documents, on a blockchain

that can then be used by other banks and other accredited organizations (such as
insurers, car rental firms, loan providers, etc.) without the need to ask the cus-
tomer to start the KYC process all over again. These organizations will know that
the customer’s ID documents have been independently checked and verified so
they will not need to carry out their own KYC checks, reducing their administrative
burdens and costs. As data stored on blockchain is irreversible, it would provide a
single source of truth thereby minimizing the risk of duplication or error. There is
also the advantage for the customer that they only have to supply KYC documents
once (until they need to be updated) and that they are not then disclosed to any
other party (except for their own bank) as the other organizations will not need to
see and check the ID documents but will just rely on the blockchain verification.
SWIFT has established a KYC Registry with 1,125-member banks sharing KYC
documentation—however, this is only 16% of the 7,000 banks on their network.
The KYC Registry meets the need for an efficient, shared platform for managing
and exchanging standardized KYC data and it’s free to upload the documentation
to the Registry and to share it with other institutions. SWIFT validates the data
rigorously, informs the client if it is incomplete or needs updating, and sends out
alerts to correspondents whenever the data changes.
There will still be issues surrounding security and privacy of customer’s KYC
information but, as long as all KYC is held on a private blockchain rather than a
public one, these issues should be minimal from a bank customer’s point of view.
The data on the blockchain will merely be a reference point with a digital signa-
ture or cryptographic hash—which would give individuals access to the relevant
client information in a repository separate to the blockchain, ensuring a secure
and private way of conducting and storing a customer’s KYC information. Equally
important, though, is ensuring financial institutions only have permissioned
access on a temporary basis so that access to KYC information is only granted
when strictly necessary for that purpose, and for no other ancillary reason. There-
fore, it is evident that blockchain could have a major role in streamlining these
KYC and AML processes—although this may require cross-border consensus as to
what is regarded as acceptable KYC documentation and what needs to be done in
terms of acceptable verification of those documents.
According to a Goldman Sachs Report,8 the banking sector can achieve 10%
headcount reduction with the introduction of blockchain in the KYC procedures.
This amounts to around US$160 million in cost-saving annually. Blockchain will
also reduce the amount of budgetary resources allocated for employee training,
8 Schenider, J. (2016). BlockChain: Putting Theory into Practice. Goldman Sachs.

Blockchain Infrastructure 133
there will be 30% headcount reduction amounting to US$420 million. Overall

operational cost savings are estimated to be around US$2.5 billion dollars. AML
penalties will also be reduced by an estimated US$0.5 to US$2 billion dollars.
Blockchain Infrastructure
The elements of computing are storage, programs, and communications. Main-

frames, PCs, mobile, and cloud all manifest these elements in their own unique
ways. So what are the main elements of a blockchain? Just like the “cloud” that
does not simply exist as a magical entity by itself, a blockchain does not exist as a
chain on its own. Rather, the blockchain application is really made up of building
blocks of computing that can be used together to create effective decentralized
applications.
In a centralized system, programmers may use Amazon S3 for raw data
storage, MongoDB Atlas for databases, and Amazon EC2 for processing. In the
storage element, they may have file systems and databases, where file systems
are for storing raw data like mp3s with a hierarchy of directories and files, and
databases are for storing structured metadata with a query interface like SQL.
In creating decentralized apps (Dapps), the main building blocks of decentral-

ized computing are (see Figure 5.4):
– Storage: token storage, database, file system/raw data
– Processing: stateful business logic, stateless business logic, high perfor-
mance programs
– Communications: connect networks of data, of value, and of state
Source: https://blog.bigchaindb.com/blockchain-infrastructure-landscape-a-first-principles-
framing-92cc5549bafe
Figure 5.4: The 3 Main Elements of Decentralized Computing
In this section, we intend to provide an illustrative understanding of the key ele-

ments of decentralized computing. Despite trying to make it as simple as we can,
these sections may appear to be too technical for some readers, but insightful for
others.
Storage
The fundamental computing element of storage has the following building

blocks:
Token storage: Tokens are stores of value (e.g., assets, securities) whether it is
air miles, bitcoins (alt coins), digital art copyrights, or telco talk time. The main
actions on a token storage system are to issue and transfer tokens (with many
variants), while preventing double-spends, fraud, etc.
Bitcoin and Zcash are two prominent coin systems focusing solely on trans-
actional exchange. Ethereum happens to use tokens in service toward its mission
of being a world computer. These are all examples of tokens given out as internal
incentives to run the network infrastructure.
Other tokens are not internal to a network to power the network itself, but
are used for incentives in a higher-level network where the lower-level infrastruc-
ture actually stores the tokens. One example is ERC20 tokens like Golem (GNT)
running on top of the Ethereum main net. Another example is Envoke’s IP licens-
ing tokens, running on the IPDB network.
Finally, it is important to note that most blockchain systems have a mecha-
nism for token storage.
Database: Databases specialize in storing structured metadata, for example, as

tables (relational DB), document stores (e.g., JSON), key-value stores, time series,
or graphs; and then rapidly retrieving that data via queries (e.g., SQL).
Traditional distributed (but centralized) databases like MongoDB and Cas-
sandra routinely store hundreds of Terabytes and even Petabytes of data, with
throughput that can exceed 1 million writes per second. Query languages like
SQL are great because they separate implementation from specification, and are,
therefore, not constrained to any particular application. SQL has been a standard
for decades. This is why the same database system can be used across many dif-
ferent industries.
File system/Raw data storage: These are systems to store large files (movies,
mp3s, large datasets), organized in a hierarchy of directories and files.
IPFS and Tahoe-LAFS are decentralized file systems that wrap decentralized
or centralized raw data storage. FileCoin, Storj, Sia, and Tieron do decentralized
raw data storage. The file-sharing BitTorrent also does the same, although it uses
a “tit-for-tat” scheme rather than tokens. Ethereum Swarm, Dat, and Swarm-JS
do basically both.
Data marketplace: These systems connect the data owners (e.g., enterprises) with
data consumers (e.g., AI startups). While they are higher-level than databases
and file systems, they are nonetheless core infrastructure because the countless
applications that need data (e.g., anything AI) will depend on such services.
Ocean is an example “protocol and network,” on which data marketplaces can
be built. There are also application-specific marketplaces: Enigma Catalyst for
crypto markets, Datum for personal data; and DataBroker DAO for Internet of
Things (IoT) streams.
Processing
The fundamental computing element of processing for Dapps is the smart con-
tract. “Smart contracts” systems are the popular label for systems that do pro-
cessing in a decentralized fashion. This actually has two subsets with very differ-
ent properties: stateless (combinational) business logic and stateful (sequential)
business logic. Stateless versus stateful gives revolutionary differences in com-
plexity, identification, verifiability, etc. There is a third decentralized processing
building block: high-performance compute (HPC), which we discuss at the end
of the chapter.
Stateless (combinational) business logic: This is any arbitrary logic that does
not retain state internally. In electrical engineering terms, it can be structured
as combinational digital logic circuits. The logic is represented as a truth table,
schematic diagram, or code holding conditional statements (combining if/then,
and, or, not). Because they do not have state, it is easy to verify large stateless
smart contracts, and therefore to build large verified/secure systems.
The interledger protocol (ILP) contains the crypto-conditions (CC) protocol to
cleanly specify combinational circuits (where the output is a pure function of the
input). CC is important to know of because it is becoming an internet standard
via the Internet Engineering Task Force (IETF), and because ILP is getting wide-
spread adoption among centralized and decentralized payments networks (e.g.,
> 75 banks via Ripple). CC has standalone implementations in JavaScript, Python,
Java, and more. BigchainDB, Ripple, Stellar, and other systems use CCs; and thus
support combinational business logic and smart contracts.
Because stateful logic is a superset of stateless logic, hence systems that
support stateful logic also support stateless logic (at the expense of additional
complexity and verifiability challenges).
Stateful (sequential) business logic: This is any arbitrary logic that does retain
state internally—it has memory. Or, it is a combinational logic circuit with at least
one feedback loop (and a clock). For example, a microprocessor has an internal
register that gets updated according to machine-code instructions that are sent
to it. More generally, stateful business logic is a Turing machine that takes in a
sequence of inputs, and returns a sequence of outputs.
Ethereum is the best-known blockchain system that manifests stateful busi-
ness logic and smart contracts running directly on-chain. Lisk, RChain, DFINITY,
Aeternity, Tezos, Fabric, Sawtooth, and many more also implement it. Running
code that is “just out there, somewhere” is a powerful concept, with many use
cases. Trent McConaghy9 believes that this helps explain why Ethereum took off,
why its ecosystem has grown such that it is almost a platform in its own right, and
why so much competition has arisen in this building block.
Because sequential logic is a superset of combinational logic, these systems
also support combinational logic.
For many use cases in decentralized processing, McConaghy deems there is
a simpler approach: by simply having the processing on the client side within
the browser or the mobile device, running JavaScript or Swift. This architecture
is easy for mainstream web developers. For example, all that many web apps
need is an application state. To build this you just need JS + IPDB (using js-bigc-
haindb-driver). For raw data storage and payments additions, then include the JS
client versions of IPFS (ipfs.js) and Ethereum (web3.js).
HPC: This is processing to do “heavy lifting” programming for things like render-
ing, machine learning, circuit simulation, weather forecasting, protein folding,
and more. A programming job here might take hours or even weeks on a cluster
of machines (CPUs, GPUs, even TPUs10).
9 Founder of OceanProtocol and BigchainDB.

10 The CPU controls all of the other parts of a computer. The GPU can only handle graphics, al-
though it can be used for calculations by some special scientific applications. A TPU is a special
chip for machine learning.
McConaghy imagines that some blockchain engineers envision these approaches

to decentralized HPC:
– Golem and iEx.ec frame it as a combination of decentralized supercomputer
along with associated apps.
– Nyriad frames it as storage processing. Basically, the processing sits next to
decentralized storage (which Nyriad also has a solution to).
– TrueBit allows third parties to program, but then does post-compute check-
ing (implicitly checking when possible; explicitly checking if questions get
raised).
McConaghy thinks some programmers are simply running heavy computation on

VMs or Docker containers, and putting the result (final VM state, or just com-
puted results) into raw data storage with restricted access. They can then sell
access to these containers using, for example, tokenized read permissions. This
approach asks more of clients to verify results, but it is good to know that such
tech is already possible today.
Communications
The third and final fundamental decentralized computing element is communi-

cations. There are many ways to frame communications but we will focus on con-
necting networks. It comes in three levels: data, value, and state.
Data: In the 1960s, ARPAnet was created as a data network, and its success
spawned several similar networks like NPL and CYCLADES. However, they did
not have the ability to communicate with each other. Cerf and Kahn invented
TCP/IP in the 1970s to connect them, to create a network of networks, which we
now call the internet. TCP/IP is now the de-facto standard to connect networks.
Despite its age, TCP/IP can be viewed as a decentralized building block for con-
necting networks of data.
Value: TCP/IP only connects networks on a data level. You can double-spend
packets —send the same packet to more than one destination at once. But what
about connecting networks where someone can send value across the networks?
For example, from bitcoin to Ethereum, or even SWIFT payments network to say
Ripple’s XRP network. In such cases, the token is intended to be able to go to
one destination at a time. One way to connect networks while preventing dou-
ble-spends is to use an exchange, but that is more complicated than it needs to
be. Instead, blockchain engineers have stripped an exchange to its essence and
removed the need for a trusted middleman, by using cryptographic escrow. Peter
can send money to Charlie via Victoria, where Victoria is passing on the funds
but can not spend them (and there is a time constraint so that Victoria can not
delay or stall). This is the essence behind the ILP. It is the same conceptual idea
as two-way pegs (like sidechains) and state channels (like Lightning and Raiden);
but the focus is solely on connecting networks with respect to value. Besides ILP
there is Cosmos, which adds a bit more complexity for convenience on certain
use cases.
State: Beyond connecting networks of value, engineers are pondering something

with its own crypto-wallet that can hop from one network to another. These ideas
include a smart contract in one Ethereum main net that can move its state to
another Ethereum net, or another compatible net. Also, removing restrictions
from an AI DAO to just one net and enable it to connect to others.
Some systems are already getting there; Polkadot is one that is able to connect
networks of state, and Aeternity fits somewhere between the network-of-value
and network-of-state spectrum.
Furthermore, as we speak, the blockchain community is starting to build
systems that manifest combinations. There are many combinations of two blocks
at once, usually IPFS + Ethereum or IPFS + IPDB. And there are even engineers
using three or more blocks. Such is the level of experimentation and innovation
that is happening in the decentralized digital ecosystem.
References
Evans, P., Aré, L., Forth, P., Harlé, N., & Portincaso, M. (2016). Thinking Outside the Blocks:
A Strategic Perspective on Blockchain and Digital Tokens. Boston Consulting Group.
December 1.
Gansky, L. (2010). The Mesh: Why the Future of Business Is Sharing. Portfolio Penguin, NY.
GitHub. Blockchain Based Proof of Work. GitHub. March 2014.
Nakamoto, S. (2009). Bitcoin: A Peer-to-Peer Electronic Cash System. White paper, 2009, 1-9.
Oliver Wyman, Anthemis Group and Santander Innoventures (2015). The Fintech 2.0 Paper:
Rebooting financial services.
Schenider, J. (2016). BlockChain: Putting Theory into Practice. Goldman Sachs.
Szabo, N. (1996). Smart Contracts: Building Blocks for Digital Markets. Extropy, no. 16.
Chapter 6
Expanded Use Cases of Blockchain
Smart Contracts in Islamic Transactions
Contractual agreements are key enablers for trade and commerce which record
mutually agreed upon terms for execution or dispute resolution. The Quranic
verses (Surah Al-Baqarah: 282–283) enjoin Muslims to put contracts in writing for
fairness and accountability. As such, Muslim traders rely upon an Islamic legal
and institutional framework for the purposes of accounting and accountability,
while Muslim scholars define legal norms and act as mediators in commercial
disputes. Possessing written records is vital to the efficiency and transparency
of commerce and for monitoring trade and agreements. Islamic law is the central
institutional framework of being Muslim, and its inherent legal framework dic-
tates, among other things, the ethical norms of business behavior, to form the
foundation for trust, equality, and fairness.
As the world evolves, we use technology to operationalize the specific intents
of the Shariah so that Islamic economic actors can be adept at more efficient
(and less risky) ways of doing business. Reliance on physical documents leads to
delays, inefficiencies, and increases exposure to errors and fraud. Financial inter-
mediaries, while providing interoperability for the finance system and reducing
risk, create unnecessary overhead costs and increase compliance requirements.
Smart contracts, on distributed ledger technologies (blockchain) that have the
capacity to inject greater efficiency and productivity while saving costs associ-
ated with traditional contracts. Many financial enterprises are exploring the use
of smart contract technology for various applications across the banking, finan-
cial services, and insurance (including takaful) sectors (EY, 2017). As of now, pro-
totypes developed have been simplified versions of a smart contract, but more
work needs to be done in key areas, which will tackle legal and regulatory com-
pliance, scalability and security, and the ability to code complex contracts which
currently dominate the financial services landscape.
How Does a Smart Contract Work?
Smart contracts are complex software solutions with components designed to

automate execution and settlement of contractual agreements. In other words,
they are programmable contracts that self-execute the stipulations of an agree-
DOI 10.1515/9781547400966-006
140 Chapter 6: Expanded Use Cases of Blockchain
ment when predetermined conditions are triggered. Once two or more parties
consent to all the terms within the contract, they cryptographically sign the smart
contract and deploy it to a distributed ledger (Buterin, 2013). When a condition
specified in the code is met, the program automatically triggers a corresponding
action. By removing the need for direct human involvement, a deployed smart
contract on a distributed ledger could make contractual relationships more effi-
cient, reliable, and economical with potentially fewer opportunities for error,
misunderstanding, delay or dispute.
Smart contracts do not have to be contracts at all. They can be processes
that can be administered electronically (Szabo, 1996). So, there are a wide array
of applications of smart contracts. It also should be pointed out that contract
technology has changed dramatically the past twenty years with companies like
DocuSign providing an electronic signature platform that meant you no longer
had to send your contract out to many signers and a certain amount of automa-
tion can be built in. The main difference that blockchain can afford is to add in
secure measures that can ensure that the terms are upheld, often using a third-
party oracle (not the database company), which is an electronic data feed that
signals a provision of the contract has been met so that the blockchain changes
state accordingly.
Figure 6.1: Smart Contracts on Blockchain
1. An option contract between counterparties is written as code into the block-

chain. The individuals involved can be anonymous, but the contract is a
public ledger.
2. A triggering event like an expiration date or strike price, and the contract
executes itself according to the coded terms.
3. Regulators can use the blockchain to understand the activity in the market
while maintaining the privacy of individual actors’ positions.
Smart Contracts in Islamic Transactions 141
Key features of smart contracts are: programmability, multisignature (or multisig)

authentication, escrow capability, and oracle inputs:
– A smart contract automatically executes based on programmed logic.
– Multisig allows two or more parties to the contract to approve the execution
of a transaction independently—a key requirement for multiparty contracts.
– Escrow capability ensures the locking of funds with a mediator (e.g., a bank
or an online market), which can be unlocked under conditions acceptable to
the contracting parties. Sometimes, external inputs such as prices, perfor-
mance, or other real-world data may be required to process a transaction, and
oracle services help smart contracts with inputs such as these.
There are several models of smart contracts being prototyped today, but the basic
blockchain-based technology uses public key encryption infrastructure (PKI) to
encode the terms and conditions of a contract. PKI is a method of cryptography
that uses of two types of keys. The first is a public key that all parties are aware
of, and the second is a private key known only to its recipient. In a smart contract
transaction initiated on a blockchain depicted in Figure 6.2, the sending recipi-
ent encrypts their message into an unreadable “cipher text” using algorithms or
mathematical formulas, to protect and secure the data. Only the use of a private
key can decrypt the “cipher text” back into a readable “plain text.” The key
benefit PKI brings to smart contract transactions revolves around security, as it is
extremely difficult, if not impossible, to reverse engineer a public key to a private
one, making it very resilient to failures or hacks.
Figure 6.2: How the Blockchain Cryptography Works for Smart Contracts

Automation and Enforceability
The smart contract is automatable and enforceable. It is automatable by a com-

puter or network of computers, although some parts may require human input
and control. It is then enforceable by either legal enforcement of rights and obli-
gations or tamper-proof execution.
The legal prose is linked via parameters (name-value pairs) to the smart con-
tract code that provides execution. An executable software agent on the shared
ledger will proceed to undertake various transfers of value in accordance with
the legal prose. The parameters are a succinct way to inform the code of the final
operational details.
The legality of financial smart contracts is yet to be established even in the
conventional system. Initial steps have been taken in some countries to recognize
distributed ledgers in their state courts, as should courts in Islamic jurisdictions.
Accurate translation of legal terms according to Islamic law of contracts into
software logic is another key aspect to consider. The landscape to be explored
includes increasing the sophistication of parameters from base types to complex
higher-order types to business logic that could be admissible in court and poten-
tially replace the corresponding legal prose into contract code. In Islamic econ-
omies, legislators, regulators, and governments should realize the potential
for distributed ledgers in increasing transparency and ease of compliance and
reporting. The push from these authorities will be instrumental in overcoming
legal and administrative hurdles.
Benefits and Evolution of Blockchain-Based Smart Contracts
Contracts or records stored on blockchains eliminate the need for a central inter-
mediary to provide trust in the system. For markets that do not use intermediar-
ies, it is still more trust than existing operations. By automating parts of business
processes in the short run and possibly entire processes in the long run, smart
contracts would significantly reduce the costs associated with areas such as com-
pliance, record keeping, and manual intervention. A significant benefit from the
power of the technology is in reducing costs, risks, error rates, and reconciliation
processes while allowing everyone to have a shared infrastructure. It frees up
capital and assists with compliance and regulatory reporting.
In trading securities, for example, most securities have a delayed settlement,
with settlement times of T+2 or longer being common. Smart contracts have the
potential to bring this down to minutes. This would also free up capital in the
system by reducing mandatory collateral requirements for the trading of equities
Smart Contracts in Islamic Transactions 143
and would thereby improve return on capital. With smart contracts, workflow can
be made more efficient by providing each of the people or points in the workflow
with greater visibility into the state of an asset in the workflow. At the next level,
this could be possible among a group of companies with proper governance. Ulti-
mately, when these smart contracts become admissible in courts, it would make
the entire system operational and efficient.
Applications of Smart Contracts
Smart contracts on the blockchain could and will create efficiencies and therefore
savings for every category of monetary markets, investments, and other finan-
cial services like insurance/takaful but more important, they will reorganize how
certain services are run within the economy. To illustrate this, we focus on some
financial service areas, which could benefit from immediate sizeable savings:
Capital Markets and Investment Banking

With the deployment of smart contracts, software can be created to extrapolate
specific data or carry out specific instructions if certain parameters are satisfied
or triggered. Authorized matching of trades during the settlement process can be
done via smart contracts. With smart contracts, trade agreements such as collat-
eral, loan, swap, sukuk, and other agreements could be met by writing specific
instructions via code onto the ledger.
– Structured finance, like settlements of syndicated loans, sukuk, etc. A long
settlement period creates greater risk and a liquidity challenge in loan
markets.
– Stock exchange market infrastructure like clearing and settlements of equi-
ties.
Commercial and Retail Banking

The smart contract also facilitates automatic payment processing, only if certain
parameters within the agreed upon contract are satisfied. Because of smart con-
tracts, costly errors from the manual processing of contractual terms, including
settlement instructions, can be reduced considerably. If an Asian bank has trans-
acted a trade or swap contract with a U.S. bank, the settlement details would only
be provided if the financial details of the trade match between the two banks.
– Trade finance like supply-chain documentation, invoicing, and payments in
letters of credit, trust receipts, etc.
– Mortgages for housing. The mortgage loan process relies on a complex eco-
system for the origination, funding, and servicing of mortgages, with consid-
erable costs and delays.
– Loans of any kind, including crowdfunding for start-ups and small and medi-
um-sized enterprises (SME). Distribution of equity of micro, small, and medi-
um-sized enterprises (MSMEs) to investors.
Takaful
By moving insurance claims onto an immutable ledger, blockchain can help elim-
inate common sources of fraud in the insurance industry. A shared ledger and
insurance policies executed through smart contracts can bring an order of mag-
nitude improvement in efficiency to property and casualty insurance. Through
the blockchain, medical records can be cryptographically secured and shared
between health providers, increasing interoperability in the health insurance
ecosystem. By securing reinsurance contracts on the blockchain through smart
contracts, the blockchain can simplify the flow of information and payments
between insurers and reinsurers.
– Automated claims processing in commercial insurance, motor insurance, etc.
Smart contracts that bring insurers, customers, and third parties to a single
platform will lead to process efficiencies, and reduced claim processing time
and costs.
– New products like peer-to-peer insurance/takaful.
The migration of traditional contracts to smart contracts can be estimated to save

billions of dollars in the global Islamic finance markets. They are indeed signifi-
cant, but do not come without challenges to be overcome, but it will be possible
with the determination and resources to do so.
Islamic Trade Financing
Trade is the lifeblood of the global economy, and banks have long played an
important role in mitigating risk and offering financing for domestic and interna-
tional trade. Trade finance and supply chain finance provide companies with the
funds and security they need to buy and sell products and services domestically
and across borders. The use of open account trading has increased in recent years
due in part to the ease of communication and exchange of information between
businesses over the internet. However, even with open account trading, there is
still a strong demand for bank services for financing, risk mitigation, data trans-
Islamic Trade Financing 145
fer and data matching. These bank services are aimed at reducing the risk SMEs
and large corporations face when trading, such as counterparty risk, the com-
plexity of complying with laws and regulations in multiple jurisdictions, the risk
of goods being lost or damaged in transit, and foreign exchange risk.
As technology shifts and the popularity of open account trading1 has
expanded (making up about 90% of global trade today), banks and corporations
require solutions that will enable them to overcome the pain points found in trade
finance today. The use of distributed ledgers or blockchains has been explored in
areas such as payments and securities settlement, and these technologies could
also be used to improve service in trade transactions.
Blockchain-Based Trade Finance
The exchange of trade data serves as the backbone for the trade finance workflow,
making it an ideal starting point for the use of blockchains. The approval and
matching of data found in trade documents such as invoices can be a trigger for
events that follow such as the transfer of ownership or execution of a payment.
By facilitating easy access to data and end-to-end transparency of the entire value
chain, blockchains can create a level playing field for all parties involved in a
trade transaction and facilitate improved exchange of trade information.
Settlement of securities or interest in securities are delivered, usually with a
simultaneous exchange of money, to fulfill the contractual obligation. As part of
the performance of delivery obligations of the trade, settlement involves the deliv-
ery of the securities and the corresponding payment. On top of that, settlement is
increasingly moving toward the DVP method (delivery vs. payment)—the simulta-
neous and irrevocable exchange of security and cash, to minimize the seller’s and
buyer’s risks involved in delivering one asset without receiving the contra asset at
the same time. This is sometimes referred to as dependent deliveries of security or
dependent payments of cash. In other words, the delivery of security will not be
implemented without simultaneous payment of cash and vice versa.
The exchange of trade data and auditability of a trader’s credit history can
also help increase speed, efficiency, and security in financing between buyers,
sellers, and their banks. The real-time visibility of events along a supply chain
1 An open account transaction in international trade is a sale where the goods are shipped and
delivered before payment is due, which is typically in 30, 60, or 90 days. Obviously, this option is
advantageous to the importer in terms of cash flow and cost, but it is consequently a risky option
for an exporter.
means that financing triggers can be identified sooner, which means that funds
can be released faster. Blockchains can also help improve credit ratings and risk
assessment procedures.
The lack of integration of trade financing to the trade cycle is the lack of
transparency surrounding trade and trade finance today. Trade finance also
suffers from costly and time intensive information matching, often with paper
documents that can lead to delays in the transfer of goods, initiation of payment,
or release of funds as part of a financing agreement. These manual processes,
together with the lack of transparency, also raise the risk of error or even fraud in
the case of duplicate invoice financing.
Industry stakeholders have made efforts to reduce the impact of some of
these issues (such as the development of the bank payment obligation [BPO] for
open account trading), but the difficulty with these solutions is two-fold: a lack
of adoption and a proliferation of different platforms that lack interoperability.
Figure 6.3: Using Distributed Ledger (Blockchain) in Trade Transactions
As the use of blockchains in trade finance takes hold, all parties involved can save
time and resources by eliminating the need for some of the manual processing
and data matching they do today and allowing them to focus on more profitable
propositions such as creating better products, which can be vital to businesses
involved in domestic and international trade. Figure 6.3 details the connecting
parties in a blockchain-based trade transaction.
Islamic Trade Financing 147
With real-time visibility into events along a supply chain, financing triggers
can be identified sooner. This means that funds can be released much faster
(between a buyer and seller, as well as to a bank as part of a factoring agreement).
In addition, the blockchain allows the ability of nonbank actors (shipping com-
panies, customs agents, etc.) to update ledgers immediately once a transaction
has been finalized.
Enablers to Blockchain-Based Trade Financing
To help improve trade financial services offered by banks to their corporate

clients, there are some required enablers to systematize these services. The use of
smart contracts and the development of instant payment infrastructures are two
such enablers that will greatly enhance the benefits for banks, financial institu-
tions and businesses using digitally distributed ledgers in trade finance.
Blockchain-Based Smart Contracts

The transparency of events along the supply chain via the blockchain is itself a
major enabler of faster payment and improved financing, increased efficiency,
reduced risk of fraud, and lower costs. Smart contracts are self-executing pro-
grams that automatically carry out functions once a triggering event has taken
place. They are linear contracts that can include multiple parties (buyer, seller,
banks, takaful companies, etc.) that cannot be altered.
For example, if a smart contract is written between a buyer and a seller to say
that once goods have been cleared by customs, 20% of the funds will be released
to the seller, a smart contract would automatically disburse payment once confir-
mation is entered in a distributed ledger that the customs office has cleared the
goods. The confirmation of approval by customs is not a triggering event requir-
ing action by a bank; the payment is automatically made once confirmation has
been entered into the system. With a smart contract, legal stipulations are embed-
ded in the computer code, which enables the automatic execution of functions
defined by a legal contract, though smart contracts may be simply transactional
as well, as originally conceived by Nick Szabo’s vending machine model which
today translates roughly to blockchain cybercurrency.
Smart contracts can be seen as the future of economic transactions, as they
enable more efficiencies in legal contracts through a decrease in manual pro-
cessing and initiation of contract terms, risk reduction through the elimination
of manual errors and duplicate invoice financing. However, legal and regulatory
challenges surround smart contracts in many jurisdictions, and many companies
exploring the use of smart contracts are still in the proof of concept stage. To
accelerate maturity of this technology, smart contract terms need to be standard-
ized and small scale B2B smart contract applications need to succeed. Adoption
for use in trade finance will pave the way to the actualization of the theoretical
benefits.
Instant Payment Structures

The development of instant payment infrastructures is another key enabler that
will add speed and efficiency to trade transactions that currently may require
human interactions. Over twenty countries around the world have already imple-
mented instant payment infrastructures (like Ripple and Stellar), and major
markets such as Australia, the United States, the Eurozone, and Asia are in the
process of developing and testing instant payment systems. With the ability to
send and receive domestic payments within seconds, the movement of money
triggered by events along the supply chain can proceed more rapidly, which
means that shipping companies, customs offices, and sellers have quicker access
to funds. Instant payments can also enable buyers and sellers to obtain funding
from their banks faster than they do today, which can lead to a further optimiza-
tion of working capital and unlock liquidity from supply chains.
Current Challenges
The adoption of blockchain-based trade finance still faces several challenges,

including an unclear legal and regulatory environment, the need to extend the
speed and the scalability of the technology, and the challenge of creating a
network effect to spur adoption of distributed ledgers in the trade finance space.
If Islamic countries and industry stakeholders work together to meet these chal-
lenges, they stand to realize significant tangible benefits. Distributed ledgers
can ensure full transparency of the value chain, reduced error rates and credit
risk, lower costs, improved convenience, and provide a level playing field for all
participants. This in turn can help corporations improve liquidity and working
capital, upgrade the reconciliation process, and provide additional financing
opportunities, while allowing banks to meet customer expectations, modernize
information technology (IT) systems, enable the development of new products,
and avoid disintermediation. In Islamic economies, legislators, regulators, and
governments should harness the potential for distributed ledgers in increasing
transparency and ease of compliance and reporting. The push from these author-
ities will be instrumental in steadily developing advanced trading, legal enforce-
Takaful (Islamic Insurance) on the Blocks 149
ment and administrative systems that are crucial to empower justice as well as
prosperity.
Takaful (Islamic Insurance) on the Blocks
As a niche section of the insurance sector, the takaful segment is significantly

impacted by the disruptions occurring within the insurance sector. The global
insurance market had a reasonable growth rate, with global real premium growth
rates of 2.9% in the advanced economies and 7.4% in the emerging and develop-
ing countries in 2014, an improvement over the 2012 and 2013 rates (IFSB, 2016).
Likewise, the growth rate of gross contributions in the takaful sector demon-
strated a recovery in 2014 from 2013, when the growth rate of premiums was by
far the lowest historically.
In its Islamic Financial Services Industry (IFSI) Stability 2017 report, the
Islamic Financial Services Board (IFSB) observed that the reinvigorated gross
contributions of the takaful sector reached US$22.1 billion in 2014, up from only
around US$5 billion in 2006. In 2016 the global insurance market reported steady
growth rates, supported mainly by emerging markets. Nonlife premiums in emerg-
ing Asia expanded at a rate of 7.3% in 2016, after a strong 9% growth in 2015.2
Another notable trend in emerging Asia was the slowdown in motor insurance
uptake following lower car sales. Similarly, anecdotal evidence points to lower
sales of new cars in the key takaful domain of Saudi Arabia in 2016,3 and to a 13%
decline in car sales in Malaysia in the same year.4 Meanwhile, medical expense
premiums in emerging markets continued to grow at double-digit rates in 2016,
attributable to operators in China where private medical insurance is gaining
traction alongside state medical support schemes. Of importance, policy makers
in selected Gulf Cooperation Council (GCC) countries have recently pushed for
mandatory medical coverage requirements, thus supporting the uptake and pre-
miums of medical takaful in the region.
The biggest share of the takaful sector belonged to GCC countries, followed
by Iran and the East Asia and Pacific region. The other three regions (Africa,
South Asia, and Levant) had a very much lesser share of the total. As takaful’s
share of the insurance sector is only 1%, there is a long way to go for the takaful
sector. Indeed, the low penetration rates in certain countries in which the takaful
2 Swiss Re, Global Insurance Review 2016 and Outlook 2017/2018.

3 Recession cripples car sales, Saudi Gazette (October 2016).
4 MAA expects slight increase in car sales this year, The Star Online (January 2017).
industry operates, indicate an available market for the takaful sector. Since many
of the target markets like Turkey, Saudi Arabia, Pakistan, Qatar, and Egypt, have a
growing middle-class and young populations with solid growth prospects, there
is promise for the takaful sector to grow further.
Three jurisdictions account for 84% of the global takaful contributions: Saudi
Arabia (37%), Iran (34%), and Malaysia (14%). However, the types of takaful pro-
vision are different for different jurisdictions, for example, in Malaysia nearly
two-thirds of the takaful contributions are for family takaful (which features a
strong savings/investment component). In Saudi Arabia and Iran, insurance
such as medical/health or motor takaful is prevailing. The current low propaga-
tion of takaful services indicates there is ample opportunity for further growth
of the insurance/takaful industry, combined with high population growth and a
growing middle class.
Also, the IFSI report revealed that the business profiles of takaful operators
differ among the countries. They found that in Malaysia, family takaful is 68.1%
of the total business line, which is the highest number in the sample. The combi-
nation of a relatively young population, a high percentage of working population,
a vibrant social security system, and saving incentives for retirement, play a part
in the high proportion of life insurance in its society, including family takaful.
Behind Malaysia is Pakistan and the UAE, which comprise a reasonable share of
family takaful—around 30%. This is not so in Saudi Arabia, where health cover-
age is compulsory and a tradition of long-term saving using insurance/takaful
products is nonexistent. Other countries with low shares of family takaful are
Kuwait (at 8.6%) and Bangladesh and Qatar (both at 0%). Given the rising birth-
rates and growing middle class, policies geared toward increasing public aware-
ness of such services, as well as those encouraging long-term savings such as
unit-linked instruments could grow the family takaful business.
Motor takaful is the second most important business line in the sample
countries of the IFSI report, with an average of 27.7% over the entire sample of
countries. Kuwait has the highest share of motor takaful, followed by Sri Lanka,
Pakistan, and Qatar.
The third most important business line for takaful was Fire, Property and
Accidents, with the highest levels in the domestic markets of Qatar and Bangla-
desh. Other business lines in the takaful sector include the Workmen’s Compen-
sation and Energy Takaful, which has a considerable traction in the UAE and Sri
Lanka.
A Model for a Blockchain-Based Takaful
Smart contracts deployed through the blockchain will provide customers and
takaful (insurance) companies a system to manage claims in a transparent, quick,
and indisputable manner. Takaful policies, along with its terms and conditions,
and potential claims can be recorded onto the blockchain and validated by the
network, ensuring valid claims are dispensed and false claims are rejected.5 For
example, the blockchain will reject multiple claims for one accident because the
network would know that a claim has already been made. Smart contracts would
also process claims efficiently by triggering payments automatically when certain
conditions are met and validated. To more effectively detect identity fraud, falsi-
fied injury or damage reports, etc., blockchain can be used as a cross-industry,
distributed registry with external data and customer data to:
– Confirm authenticity, ownership, and origin of goods as well as the legiti-
macy of documents (e.g., medical reports)
– Check for police reports indicating theft, claims history as well as a person’s
verified identity and expose patterns of deception related to a person or
identity
– Proof of date and time stamps of policy issuance or purchase of a product/
asset
– Validate ownership and site changes
Still, to attain full blockchain-specific benefits from these applications above

what is achievable with traditional solutions and other current types of coopera-
tion, for example, via industry associations, broad cooperation between insurers,
customers, manufacturers, and other stakeholders is needed. This is an example
of an ecosystem growing beyond the traditional industry practice in the sharing
economy of the digital era. Emerging blockchain applications and four key areas
where we see the most potential for evolution and transformation are:
Fraud Detection and Risk Mitigation

Blockchain has the potential to eradicate mistakes and detect deceptive activity
because of its ability to be a public ledger across multiple unknown parties. A
distributed digital depot can autonomously confirm the legitimacy of customers,
policies and transactions (such as claims) by presenting a comprehensive histor-
5 An estimated 5 to 10% of all claims are fraudulent. According to the estimated global size of the
takaful industry, this costs takāful operators more than US$2billion per year.
ical record. As such, insurers would be able to spot fake or counterfeit transac-
tions involving doubtful people and suspect entities.
First-mover insurers are already evaluating the use of blockchain to mitigate
scams and risks related to cross-border payments and transactions linking mul-
tiple currencies. In forte insurance and reinsurance segments, where insurers
are often disconnected from the clients, blockchain may be used to tackle the
significant inefficiencies, disparities and errors caused by bad data quality from
the front and back offices. In the United States, health insurers and regulators
view blockchain as a powerful tool for fighting Medicare deceit. Validation and
verification form the nucleus of the blockchain business case, which can improve
many insurance processes.
Blockchain will lessen administrative and operational costs through auto-
mated verification of policyholder identity and contract validity, auditable
records of claims and information from third parties (e.g., encrypted patient data
between a doctor and an injured party manageable by the insurer to authenticate
payment), and disbursement for claims through a blockchain-based payments
infrastructure or smart contracts-linked escrow account. Providing reinsurers
controlled-access to claims and claims histories recorded on the blockchain
increases transparency for the reinsurer in an automated yet auditable manner.
Claims Processing and Management

In addition to mobile and digital technologies, blockchain is essential to estab-
lishing an efficient, transparent and customer-focused claims model based on
higher degrees of trust through transparency. Within claims management, new
data streams can enhance the risk selection process by combining location, exter-
nal risk and data analytics. A distributed ledger integrated with existing systems
can enable the insurer and various third parties to easily and instantly access and
update relevant information (e.g., claim forms, photo evidence, police reports,
and eye-witness or third-party accounts).
The use of data from a mobile phone can simplify claims submissions, reduce
loss adjustment costs and increase client satisfaction, with blockchain systems
connecting communications to all parties.
Correspondingly, the use of mobile technologies, satellite imagery, sensor
data, and blockchain could facilitate claims payments and rescue services when
natural disasters occur in remote areas. Information collected from weather
stations could establish claim amounts based on actual climate readings, with
blockchain facilitating more efficient data sharing and stronger protection
against fraud.
In addition, this advanced technology will be able to work effortlessly with

the internet of things (IoT) where massive numbers of devices are linked via the
internet. For example, accident claims can be made through an app provided
by the insurer by taking pictures or sending videos of accidents which are time-
stamped. Together with blockchain solutions for know-your-client (KYC) data,
a client can send the verified identity data to other companies for confirmation
with the same app, avoiding the need to repeat the verification process, thus
expediting efficiency in the on-boarding of new users.
New Distribution and Payment Models

Some international insurers are already developing partnerships and exploring
new payment systems and business models (cryptocurrencies and digital wallets)
to achieve capital efficiencies through a truly public global ledger system.
Increased computerization used to acquire risk information in contracts also
suggests new opportunities to build market intelligence, simplify payments and
build financial risk models. At the very least, global insurers can use blockchain
to remove asset management costs or hedging fees required for mitigating cur-
rency fluctuations in cross-border and international transactions.
In the new business model, the focus of the insurers would be on match-
ing supply and demand and to risk calculation research, instead of asset man-
agement. The insurer could create a marketplace-like platform where customers
can post their insurance demand, which could be either a standardized product
or even a specific demand. The insurer then would use its risk models along
with “risk assessment intelligence,” based on available historical information,
to perform a premium calculation for the expected return. With this expected
return, interested investors can bid or subscribe to the demanded insurance.
With the use of smart contracts and records on a decentralized ledger, the
payment from the investor to the customer in the event of an insurance claim
becomes cheaper, transparent, and more efficient than long-established ways. In
addition, the investors know their maximum exposure as the amount defined in
the smart contracts.
The insurer can also now play the role of assessor of the damage to validate
the authenticity of the insurance claim. But this could as easily be outsourced to a
third party and by connecting blockchain to other ledgers where verification can
be done automatically.
Reinsurance
Property and casualty insurers seeking clearer visibility into their reinsurance
contracts and risk exposures may gain it through blockchain. Consider the case of
an insurer seeking to offload an equal amount of risk to two separate reinsurers.

A blockchain ledger could provide insight and notification if one of those reinsur-
ers then tried to offload some of its portion to a subsidiary of the other reinsurer.
It also would help insurers gain confidence that, as they pay out claims, they are
appropriately rebalancing their capital exposures against specific risks.
Within reinsurance, the benefits of blockchain include more accurate reserve
calculations based on actual participating contracts and automatic calculation
updates once the primary information and data are updated. On top of that,
insurers obtain more room to move capital and improve transparency into known
risks, capital productivity and compliance. Operationally, the process of audit
trails becomes simpler to chart, modeling requirements are significantly reduced
and there is less coordination required between the finance and IT functions.
Blockchain-Based Islamic Capital Markets
An Islamic bank could set up a new trading platform (or move across an exist-
ing trading platform) on a blockchain protocol. Blockchain technology offers
the potential to support a new medium to exchange assets without centralized
trusts or intermediaries—and without the risk of double spending. As already
discussed, blockchain can eliminate the threat or the risk of fraud in all areas of
banking, and this could equally apply to a trading platform. Furthermore, block-
chain would also address issues such as operational risk and administrative costs
as it can be made transparent and immutable. The traceability and the perma-
nent historic record that would exist on the blockchain backing up every asset or
item of value that was traded, would provide assurance and authenticity all the
way through the supply chain. This, again, will be determined by the advances in
technology needed to speed blockchain transactions.
In practice, when a high-value item is first created, a corresponding digital
token is issued by a trusted central authority which acts to authenticate the prod-
uct’s point of origin. Then, every time the product is bought and sold the digital
token is moved in parallel so that a real-world chain of ownership is created and
mirrored by the blockchain history of that digital token. The digital token is acting
as a virtual “certificate of authenticity,” which would have the advantage that it is
far harder to steal or forge than a piece of paper, database or spreadsheet. Upon
receiving the digital token, the final recipient of the product will then be able to
verify the chain of custody all the way back to the point of creation. Blockchain
gives the benefit of distributed and verifiable trust that was not present before.
As a nonbanking example, Everledger, a permanent ledger for diamond
certification, has adopted the use of bitcoin as a mark of authenticity providing
Blockchain-Based Islamic Capital Markets 155
transparency for all parties involved—a clear attempt to prevent diamond fraud.
Similarly, the immutability and digital uniqueness inherent in blockchain offers
the ability to provide a secure transfer of value and endorsement of authenticity.
The challenge of maintaining data privacy among counterparties to trade
transactions is also overcome by utilizing blockchain technology where tokeni-
zation, in the form of cryptography, is used to protect the trade data with parties
only allowed access to permissioned information with the correct security key.
This should enable the most confidential of transactions, especially financial
transactions, to still take place on such a trading platform.
Clearing and settlement costs billions and, according to Santander’s 2015
joint report6 produced in collaboration with Oliver Wyman and Anthemis Group,
it is estimated that moving this into a digital record, near real-time and over the
internet, will save the industry $20 billion a year or more in overhead costs due
to D+3. D+3, or T+3, the three-day clearing and settlement cycle common to most
investment markets today. Many firms are leading the charge to digitize the clear-
ing and settlement structures from Blythe Masters’ Digital Asset Holdings with
the Hyperledger to Overstock with T-0, along with many other key and emerging
players such as Epiphyte, Clearmatics and SETL.
McKinsey7 expects that adoption of blockchain technology in capital markets
will be marked by four stages of gradual development: single-enterprise adop-
tion across legal entities; adoption by a small subset of banks as an upgrade to
manual processes; conversion of inter-dealer settlements; and, finally, large-
scale adoption across buyers and sellers in public markets.
The likely adoption of blockchain in capital markets by industry participants
would be in these four key actionable areas:
– Assessment of business impact and plan for the long term. Firms should
invest now in technology and expertise related to blockchain, and push for
industrywide cooperation.
– Industry cooperation and engagement with regulators. Industry participants
will need to work together to design solutions for specific asset classes and
processes. Banks and other market participants must form consortia and
work with regulators early in the design process to iron out consumer protec-
tion, fair market practice, disclosure, privacy, and security.
6 http://www.finextra.com/finextra-downloads/newsdocs/The%20FinTech%202%200%20
Paper.PDF
7 http://www.mckinsey.com/industries/financial-services/our-insights/beyond-the-hype-
blockchains-in-capital-markets
– Consolidate internal ledgers on the blockchain. Internal ledger synchroniza-

tion is a persistent challenge, and regulatory pressure to consolidate those
ledgers is mounting. A private blockchain-based enterprise solution would
allow fintech companies to help financial institutions.
– Modernize post-trade and manual processes: Updating legacy systems and
processes of post-trade activities such as asset booking and transfer can
make workflow more efficient and productive while being less disruptive to
existing business standards.
The blockchain revolution will not happen overnight, and will require coopera-
tion among market participants, regulators and technologists. The unlikelihood
of simultaneous, large-scale adoption will initially confine blockchain applica-
tion to subsets of financial market participants and specific use cases. However,
the potential for rapid uptake once open questions are resolved means all market
participants must be aware of the potential benefits and threats and have a plan
in place to respond.
Payments and Settlements
The main use case that is focused on when looking at the possibilities of block-
chain for banking is that of payments.
Blockchain could be used as another way of paying each other, not depend-
ing on SWIFT and other payment schemes. There is a potential role for blockchain
in payments and that blockchain could have benefits for not only bank custom-
ers, but this could also lead to operational efficiencies and cost savings for banks
themselves. Payment systems collectively are currently under a lot of pressure, as
there has been an urgency to modernize payments and to address the questions
of safety and security since the 2008 financial crash. This has led to new market
entrants, such as fintech companies, looking to solve these problems using block-
chain. The existing payment system has always gone through banks and central
banks, a process that was first put into place in the 1970s and 1980s. Apart from
speeding up money transfers, blockchain could also help banks to operate con-
tinuously, 24 hours a day. This is now somewhat expected by customers who
want an omni-channel banking experience at any time of day or night. Rabobank
has been heavily involved in the on-going development and use of Ripple Lab’s
blockchain Ripple protocol.
As of December 2017, many banks have partnered with Ripple to use block-
chain technology in making payments to customers and cross-border transac-
tions. Ripple has said that its technology could give banks a 33% reduction in
their operating costs during the international payment process and allow lenders
to move money “in seconds.” Ripple is a “real-time gross settlement system”
(RTGS), currency exchange and remittance network. Released in 2012, Ripple
purports to enable “secure, instant and nearly free global financial transactions
of any size with no charge-backs.” It supports tokens representing fiat currency,
cryptocurrency, commodity, or any other unit of value. While traditional bank
wire services use a handful of intermediaries to process overseas payments,
Ripple allows two banks to connect with each other without any intermediar-
ies. Ripple uses a dynamic currency conversion technique that allows Ripple to
always offer the lowest exchange rate. Using Ripple’s blockchain banks can offer
competitive transaction fees as well as currency conversion fees. Ripple can be
used by banks for an open-source approach to payments to replace many of the
common intermediaries in the payments industry, thereby passing on savings to
partner institutions, and thus by extension, to their customers. Currently, Ripple
recognizes a few fiat currencies like USD, GBP, EUR, etc., commodities like gold,
silver, platinum and a handful of popular cryptocurrencies like BTC, LTC, the
native cryptocurrency XRP, etc. Ripple transactions are very fast—in general, it
takes only about 5 seconds for a Ripple payment to go through. Currently, Ripple
can also process 1500 transactions per second, a number that is 500x higher than
Bitcoin’s TPS. Ripple also can scale this even further and reach as much as 50,000
transactions per second.
Thus, blockchain can be used to make payments in real-time globally, with
real-time execution, complete transparency, real-time fraud analysis and pre-
vention and at a reasonable cost. The main issue with Ripple now is that it is a
proprietary blockchain network that cannot yet connect with other systems. To
connect Ripple to other blockchain protocols an interledger protocol will have to
be developed, tested and put in place.
VISA Europe Collab and BTL Group are working on a separate concept to make
cross-border payments between banks using distributed ledgers. The project will
use BTL’s cross-border settlement platform Interbit to explore the ways in which
a distributed ledger-based settlements system (utilizing “smart contracts”) can
reduce the friction of domestic and cross-border transfers between banks. This
is a similar goal to Ripple but, as it is based on the Ethereum smart contracts
concept, it is not proprietary like Ripple and thus is potentially more scalable.
Similarly, UBS, Deutsche Bank, Santander and BNY Mellon have teamed up
with blockchain developer Clearmatics and trading company ICAP to create a
new digital representation of fiat currency called the “Utility Settlement Coin.”8
8 https://www.finextra.com/blogposting/14459/ubs-and-the-utility-settlement-coin
Although this is still proof of concept, it could potentially reduce friction in deliv-
ery versus payment scenarios by providing a faster and less expensive settlement
mechanism than existing funds transfer and currency exchange mechanisms.
In July 2018, Stellar, the seventh-largest cryptocurrency network, became
the first digital ledger technology (DLT) protocol to obtain Shariah certifica-
tion for payments and asset tokenization. The Stellar Development Foundation
announced that, following a review of the technology’s properties and applica-
tions, the Shariyah Review Bureau (SRB)—which is licensed by the Central Bank
of Bahrain and operates an international Shariah advisory practice—had certi-
fied Stellar as a Shariah-compliant vehicle for conducting monetary transfers and
tokenizing real-world assets. According to the foundation, this certification9 from
SRB will enable Stellar to forge partnerships with Islamic financial institutions
throughout the Middle East and Southeast Asia.
Sukuk on the Blockchain
One important application in Islamic capital markets for blockchain is the sukuk
(Islamic bonds) market. Sukuk are securitized, and hence tradable on secondary
markets much like a stock can be traded on a stock exchange. Islamic finance
prohibits interest payments on loans and the sale of debt; sukuk markets evolved
to securitize Islamic modes of financing such as profit sharing through asset own-
ership for a given tenure.
There are a variety of sukuk structures based on various Shariah-compli-
ant contracts: profit sharing (sukuk al-mudarabah), deferred-delivery purchase
(sukuk al-salam), leasing of assets (sukuk al-ijarah), joint venture (sukuk al-mus-
yarakah), sukuk al-istisna (project based), and cost-plus asset purchase (sukuk
al-murabahah). A notable difference between bonds and sukuk can be seen in
the case of default: bond holders are left with bad debts, but sukuk holders have
recourse to valuable underlying assets.
Sukuk has been a popular approach for governments seeking to finance
infrastructure projects, but the legal complexity and overall cost to issue sukuk
has kept it out of reach for smaller corporations and MSMEs. It has been an
excellent way to raise much needed capital, but investors have also been always
restricted to the much larger institutional investors due to the high barrier of
entry, which usually starts in the millions. However, the inability to lower these
barriers of entry at the retail level to thousands or hundreds of dollars to enable
9 https://www.stellar.org/wp-content/uploads/2018/07/stellar-compliance-sharia.pdf
wider participation (and access to more funds) for sukuk participation, and
hence wider risk and profit-sharing in the Islamic capital market, is still per-
sistent and remains an impediment to true shared prosperity.
A new approach announced in May 2018 by Blossom Finance10 aims to change
that by using the blockchain. Blossom Finance’s “Smart Sukuk” platform lever-
ages Ethereum blockchain smart contracts to increase the efficiency and reach of
sukuk issuance globally. Smart Sukuk standardizes and automates much of the
legal, accounting, and payment overhead of conventional sukuk offerings—all
backed by fully licensed legal entities in the issuing jurisdiction. Blossom’s Smart
Sukuk supports issuance of the sukuk in local currency and eliminates the need
for institutions to add cryptocurrency to their balance sheet, and is only issued
in jurisdictions with clear and viable legal frameworks to support it. Figure 6.4
illustrates a lease (ijarah) sukuk for a hospital construction project.
Source: Blossom Finance https://blossomfinance.com/press/

islamic-finance-upgraded-smarter-sukuk-using-blockchain
Figure 6.4: Illustration of a Leasing Sukuk for a Construction Project
10 https://blossomfinance.com/press/islamic-finance-upgraded-smarter-sukuk-using-block-
chain
Distributed Ledger Technology and the Over-the-Counter Market
Distributed ledger technology could introduce transparency into the opaque

unlisted and OTC market space, while still maintaining transaction confidential-
ity. The Securities Commission (SC) Malaysia has embarked on a pilot project to
explore the usage of DLT or blockchain in the unlisted and over-the-counter (OTC)
market space through its aFINity Innovation Lab. SC Malaysia expanded its Alli-
ance for FinTech community or aFINity program this year to include “innovation
labs,” which act as a platform to facilitate the testing of new digital innovations
within the finance industry.
OTC markets are decentralized markets, without a central physical location,
where market participants trade with one another through various communi-
cation modes such as the telephone, email and proprietary electronic trading
systems, as opposed to trading through a centralized exchange.
Traditionally, the unlisted and OTC market space have operated in an opaque
fashion due to limited information availability. By using a distributed ledger as the
technology underpinning the market infrastructure, all transactions and market
activities would be recorded and made available to all market participants, while
still maintaining transaction confidentiality.
Media Rights, Intellectual Property, and Trademark Protection
Today, media users are largely accustomed to having free access to a wide variety
of content, and most of them are still reluctant to pay subscription fees for
“premium” content behind paywalls. In addition, all media segments have suf-
fered significantly from digitization, since content can be copied and distributed
easily and without loss of quality. So far, the introduction of digital rights man-
agement (DRM) systems has not substantially reduced copyright infringements.
The ensuing revenue “leakage” has been only partially recovered through new
consumption models such as streaming subscriptions and micropayments for
articles. The subsequent “commoditization” of content has been undermined by
widespread piracy of intellectual property (IP).
Blockchain-based technologies have the potential to resolve some of these current

challenges:
– Paid content can receive a boost from new, micropayment-based pricing
models
– Monetization options emerge for an increasingly fragmented content inven-
tory (e.g., blogs, news bites, photos)
Media Rights, Intellectual Property, and Trademark Protection 161
– Allocation of advertising budgets becomes more accurate and targeted as

media usage can be directly linked to the respective content items
– Copyright infringements and piracy would be nearly impossible
Sealed in the chain, blocks can no longer be changed: the prevention of deletion,
editing, or copying creates true digital assets. These multiplied and decentralized
blockchain processes lead to a high level of robustness and trust. Every partici-
pant in the network can verify the correctness of transactions. Network consen-
sus methods and cryptographic technology are used to validate transactions.
Thus, trust is not established externally by a central authority or an auditor but
continuously in the network. Furthermore, the decentralized storage in a block-
chain is known to be very failure-resistant. Even in the event of the failure of
many network participants, the blockchain remains available, eliminating the
single point of failure. New information stored in a blockchain is immutable. Its
method of recordkeeping prevents deletion or reversal of transactions added to
the blockchain, once further blocks have been added. However, the technology
and the mechanisms are still evolving, and industry-wide adoption of standards
is most probably still a few years off.
With the advent of blockchain, the media industry structure could change
significantly. Blockchain technology permits bypassing content aggregators, plat-
form providers, and royalty collection associations to a large extent. Thus, market
power shifts to the copyright owners. While some applications of blockchain
technology may still seem farfetched and require further technological advance-
ments, payment-focused use cases have already been proved to work. Parts of the
media value chain are therefore already endangered by new blockchain-based
payment and contract options. These can fundamentally reset pricing, advertis-
ing, revenue sharing, and royalty payment processes. Payments or advertising
revenues no longer need to be centrally collected. Payment transactions become
less costly and the distribution of revenues is automated, based on predefined
smart contracts. Table 6.1 depicts the potential blockchain-based opportunities
in the media industry.
Table 6.1: Potential Blockchain-Based Opportunities in the Media.
Potential Cost-effective Bypassing Distribution Monetization Cross-Border

Pricing Aggregators/ of Royalty of Consumer- Consump-
Options for Distributors Payments to-Consumer/ tion of Paid
Paid Content Peer-to-Peer Content
Content
sharing
Focus Areas As micropay- Blockchain Content Consum- Cross-border

ments become allows consumption/ er-to-con- limitations of
economically everybody usage is sumer (C2C)/ paid content
efficient and to become a captured in Peer-to-peer subscriptions
digital content marketer as blockchain (P2P) content and DRM com-
is harder to reach of lead and a precise sharing plexities will
copy illegally, generation consump- and usage be decreased
new pricing becomes track- tion-based becomes by the block-
opportunities able and can analysis of transparent chain
arise be compen- playtimes is and monetiz-
sated possible able through
the blockchain
Industry Benefit Low-price Liberalization Near real-time Transparent Decreased

content of advertising allocation and complexity
(< US$1.99) market of royalty “controllable” of rights
can efficiently payments P2P management
be settled More precise transactions Direct
between seller performance Alternative linkage of
and buyer tracking of to imprecise Automated consumption
advertising estimates “real-time” to user
efforts billing through
blockchain
Automated authentication
“real-time”
billing
Generating Advertising Revenues
Blockchain facilitates customer relationships. Based on the blockchain, everyone

from leading media houses to small bloggers can easily generate advertising rev-
enues. As blockchains permit an exact tracking of content usage, they also enable
a direct allocation of advertising budgets. Together with new, blockchain-enabled
micropayments, content creators can establish direct relationships with their
Media Rights, Intellectual Property, and Trademark Protection 163
customers. In an extreme scenario, aggregators could even become obsolete in

the future.
As soon as artists tie up digital copies of their songs or videos in a blockchain
they will be able to sell them directly to their fans without any intermediaries
such as record labels. Moreover, a fair allocation of revenues from music stream-
ing becomes possible, whether advertising-based or paid content-based. Artists
can market their songs independently of big platform providers wherever they
want, since a blockchain permits easy tracking of usage and deduction of the
associated payments.
Collections and Copyright Tracking
Collection associations could use a blockchain to create a permissioned block-

chain ecosystem for musical rights. Based on a broad consensus amongst the
parties involved, the industry bodies would act as “gatekeepers” to grant and/
or withdraw access to the closed ecosystem. In addition, collection associations,
typically acting domestically for one or a handful of countries, could use block-
chain as an enabler to enter new markets, since established measurement and
disbursement mechanisms in use with radio stations, broadcasters, and other
parties, which, for instance, play music commercially, could become obsolete
through the introduction of smart contracts.
In a different scenario, blockchain could also become a threat to traditional
collecting bodies. Up to now they have been “chasing” certain commercial users
who “do not pay their bills,” as exemplified by YouTubers illegally using copy-
righted music in their videos, or royalty dues incurred by an event DJ. With the
help of blockchain, every play of a song is recognized, counted, with royalties
tracked and allocated to specific users. The role of the collecting body, collect-
ing and distributing royalty payments, could soon become obsolete, as block-
chain-based smart contracts take over the work instead.
In a nutshell, blockchain’s potential benefits for the media industry primarily
relate to payment transactions and copyright tracking. Possible applications and
technical innovations will have a far-reaching impact: content creators may be
able to keep a close track of their playtimes, royalties and advertising revenues
could be shared in an exact and timely manner based on consumption, and low-
cost content could be purchased efficiently, even if priced at a mere fraction of
a cent. However, there are several fundamental issues and technical obstacles,
which may undermine the realization of our use cases:
– Opaqueness of blockchain platforms and standards due to quickly changing
market participants
– Usability and reach of blockchain technologies in everyday environments

– Interoperability of platforms and various standards needs to be harmonized
Media players need to consider blockchain-based applications and their poten-

tial impact on the whole industry: micropayment-based pricing options for paid
content, a shift of market power caused by content bypassing aggregators, and
an improved distribution of royalty payments, to name just a few. To ensure con-
tinued competitiveness because of digital disruption consequences to existing
media business models, companies should lose no time in identifying applica-
ble blockchain-based opportunities as a fundamental component of their future
business strategy.
LegalTech and the Evolution of Legal Services
The digitization of legal data constitutes another megatrend transforming work-

flows and business models. The volume of data used in legal advice has increased
exponentially—a pattern seen in many other industries as well. A variety of legal
technologies has emerged, enabling the digitization and automation of these
and other legal-work activities (Veith et al., 2016). In fact, findings from a survey
of law firm partners and legal-technology providers by The Boston Consulting
Group suggest that legal-technology solutions could perform as much as 30–50%
of tasks carried out by junior lawyers today. LegalTech is defined as companies
that provide software and tech-enabled services to the legal vertical (including
law firms and internal counsel) as well as tech-enabled legal services delivered
to businesses and consumers. It is the reaction to the disruption that technology
is having across all sectors of the economy. Although the legal sector is one of
the most resistant to change due to its conservative nature, access to justice is a
fundamental human right; while most cannot afford to hire legal representation
when the need arises, there is immense potential for tech companies who are
able to provide such services. Emerging start-ups like Case Text, Judicata, Rocket-
Lawyer, DragonLaw and LegalTech products like LegalZoom and DocuSign have
lowered the barrier to entry for legal protection that was previously confined to
law offices. Now anyone can assign shareholding agreements, write their will or
incorporate a company without having to seek legal counsel. The disbanding of
the traditional legal business model is good news for the public interest in afford-
able and accessible legal protection.
To better accommodate market demands, many nontraditional legal service pro-

viders (tech-enabled firms, software automating legal work, nontraditional law
LegalTech and the Evolution of Legal Services 165
firms, etc.) have emerged. The five key areas of LegalTech according to ABA (2016)
are:
Legal Research
The technology that enables the process of identifying and retrieving information
necessary to support legal decision making.
– Blockchain-based referencing non-Word files (audio, pictures, etc.)
– Using predictive analytics to filter and recommend relevant documents
– Artificial intelligence (AI)-enabled virtual assistants and chatbots perform-
ing research tasks on par with a paralegal
Contract Management
The technology that enables the management and automation of legal contract
creation and review.
– Automatically produce customized templates based on limited input
– Review documents for key and nonstandard clauses
– Organize and classify volumes of contracts (e.g., during due diligence for
M&A projects)
Intellectual Property Management
Software used to research, manage and protect IP including trademarks, copy-

rights, trade secrets and patents.
– In the near term, IP management professionals will benefit from the same
incremental improvements AI is providing in the legal research space.
– In the intermediate term, machine learning will enable the automation of the
entire IP infringement detection process.
Automation and Analytics
The emerging class of technology that leverages big data, AI, machine learning,
and other technologies to perform predictive analytics and automate legal work.
– Analyzing bodies of historical legal decisions to predict the outcome of
ongoing litigation
– Enabling clients to assess the performance of their counsel by reviewing their

history of outcomes
– Assessing arbitrators, jury members and judges for objectivity
eDiscovery
The technology that facilitates the identification, collection, preservation, pro-

cessing, review, analysis and production of electronically stored information
(ESI).
– Progressing from screening for keywords to predictive coding where algo-
rithms use predictive analytics to determine the most relevant documents
based on search
Blockchain coupled with the artificial intelligence cluster of technologies (AI as

well as machine learning, natural language processing, machine vision, etc.)
are especially applicable to the legal services space. This is because AI has been
proven to be most useful/profitable when it is fed large volumes of data (e.g., legal
research archives, eDiscovery ESI). They are also useful in automating time-con-
suming mundane formulaic tasks like screening research and filling out legal
templates. As such, AI can save the consumer massive legal fees from expensive
man-hours that traditional lawyers charge.
The opposition to putting data/applications in the cloud, which in turn was
largely driven by fear of security breaches, has largely diminished over the last
few years. Entrepreneurs and early-stage venture capitals have gotten in front of
the positive tailwinds and are starting and investing in more LegalTech compa-
nies than ever before. The number of LegalTech start-ups listed on AngelList has
increased from 15 in 2009 to 400 in 2017.11 Figure 6.5 describes the evolution of the
legal business models in the years to come.
11 ABA Report on the Future of Legal Services in the United States (2016).
LegalTech and the Evolution of Legal Services 167
Source: How Legal Technology Will Change the Business of Law. Boston Consulting Group and
Bucerius Law School (Veith et al. 2016).
Figure 6.5: Evolution of the Legal Business Model
The market size for LegalTech is quite sizeable, and in the United States, it is
US$16 billion in total addressable market (TAM)—US$9.4 billion from selling to
law firms and US$6.5 billion from selling to corporate legal departments. The
current actual spend12 of only US$3 billion reflects a less than 20% market pene-
tration, leaving a significant potential of opportunity for LegalTech firms as well
as investors. The largest areas of spend today include enterprise legal manage-
ment, contract management, and eDiscovery; while the fastest growing areas
over the next few years will include knowledge management, legal analytics, and
contract management.
References
American Bar Association (ABA). (2016). Report on the Future of Legal Services in the United
States. ABA Commission on the Future of Legal Services. August 2016.
Buterin, V. (2013). Ethereum White Paper: A Next Generation Smart Contract & Decentralized
Application Platform. White Paper, Ethereum, Ethereum.
Ernst and Young (2017). Blockchain in Insurance: Applications and Pursuing a Path to Adoption.
https://webforms.ey.com/Publication/vwLUAssets/EY-blockhain-in-insurance/$FILE/
EY-blockhain-in-insurance.pdf
Gansky, L. (2010). The Mesh: Why the Future of Business Is Sharing. Portfolio Penguin, NY.
12 Legal Services Market Global Market Report 2017, Business Research Company.
Islamic Financial Services Board (IFSB), Islamic Financial Services Industry Stability Report
2016, https://www.ifsb.org/docs/IFSI%20Stability%20Report%202016%20(final).pdf
Swan, M. (2015). Blockchain: Blueprint for a New Economy. O’Reilly Media, Inc.
Szabo, N. (1996). Smart Contracts: Building Blocks for Digital Markets. Extropy, no. 16.
Veith, C., Bandlow, M., Harnisch, M., Wenzler, H., Hartung, M., & Hartung, D. (2016). How Legal
Technology Will Change the Business of Law. Boston Consulting Group and Bucerius Law
School.
Chapter 7
Evolution of Blockchain
Introduction
Blockchain is potentially disruptive to all business intermediaries. Its disruptive-

ness is proportional to the cost, complexity, and degree of transaction duplica-
tion in the existing system of intermediation. Recent technology waves—notably
the internet of things (IoT), exploiting the proliferation of smart mobile devices,
and augmented reality—may directly endow physical objects with information
and intelligence: they make the real virtual. The technologies of token and block-
chain, conversely, endow data with continuity: they make the virtual real.
Not only is there the possibility that blockchain technology could reinvent
every category of monetary markets, payments, and financial services, it might
also offer similar reconfiguration possibilities to a great many industries within
the economy. Blockchain is fundamentally a new paradigm for organizing activity
with less friction and more efficiency, and at much greater scale than current par-
adigms (Swan, 2015). Swan believes that it is not just that blockchain technology
is decentralized and that decentralization as a general model can work well now
because there is a liquid enough underlying network with the web interconnect-
ing all humans. Including centralized or decentralized transactions: blockchain
technology affords a universal and global scope and scale that was previously
impossible.
The mining process of verifying blockchain transactions is what enables it to
be undeniably secure proved by enduring untold numbers of cyberattacks. While
bitcoin itself requires going through exchanges to convert hard currency into
cryptocurrency and storing it, new blockchain technology programming changes
eliminated the need for this. At the rate technology advances, blockchain will
eventually run its course and sprout other potential uses along the way.
With blockchain, technology companies have finally broken through to the
next leap in business transactions of every kind along with a new concept of the
“internet of value” and the rapidly advancing IoT.
When combined with distributed infrastructure technology, the IoT, can sig-
nificantly expand the return of investment (ROI) of an asset—its utilization. In
manufacturing, for example, a distributed infrastructure-based IoT could power
efficient product data-keeping. All information pertaining to a product from the
point of manufacture through the time it reaches the end user can be stored on
the ledger. This would include product history, revisions, warranty information
DOI 10.1515/9781547400966-007
170 Chapter 7: Evolution of Blockchain
and expiration date (if applicable), thus making the ledger a trusted source of
product data. Via access to the maintenance schedules on the ledger, service
requests can be triggered when a product requires maintenance.
Home appliances can be designed to interact with each other to reduce energy
consumption based on utilization. As an example, a washer can determine when
the detergent supply decreases and automatically refills itself. The machine could
also trigger a service request if it detects a component malfunction or a mainte-
nance request based on usage and/or maintenance schedule. Blockchain can be
the technology to store all of this information.
Within financial services, IoT can link the performance of a manufacturer to
its lending potential. Sensors attached to goods produced at the manufacturing
plant would monitor the products’ retail sales, a good measure of how the busi-
ness is doing. Banks can use this information to assist in a lending decision.
In 2015 Honduras implemented blockchain technology to develop incorrupt-
ible land registries. Blockchain and distributed infrastructure technology also
has potential applications in takaful (the tracking of high-value goods to protect
against insurance fraud), trade finance, supply chain management (the effective
management and tracing of documents and entities participating in the process)
and distributed identity, independent of countries or governments.
Transnational Justice Applications for the Economy
The freedom attribute associated with blockchain technologies becomes more

pronounced in the future evolution of the blockchain, the next category of appli-
cation beyond currency and market transactions. Through its global decentral-
ized nature, blockchain technology has the potential ability to circumvent the
current limitations of geographic jurisdictions. There is an argument that block-
chain technology can more equitably address issues related to freedom, jurisdic-
tion, censorship, and regulation, perhaps in ways that nation-state models and
international diplomacy efforts regarding human rights can not. There is a scale
and jurisdiction consideration that certain operations are transnational and are
more effectively administered, coordinated, monitored, and reviewed at a higher
organizational level such as that of the World Trade Organization (WTO).
The idea is to fortify transnational organizations from the limitations of geog-
raphy-based, nation-state jurisdiction to a truly global cloud. The first point is
that transnational organizations need transnational governance structures. The
reach, accessibility, and transparency of blockchain technology could be an
effective transnational governance structure. Blockchain governance is more
congruent with the character and needs of transnational organizations than
Introduction 171
nation-state governance. The second point is that not only is the transnational
governance provided by blockchain more effective, more likely would be fairer.
There is potentially more equality, justice, and freedom available to organiza-
tions and their participants in a decentralized, cloud-based model. This is pro-
vided by the blockchain’s immutable public record, transparency, access, and
reach. Anyone worldwide could look up and confirm the activities of transna-
tional organizations on the blockchain. Thus, the blockchain is a global system
of checks and balances that creates trust among all parties. This is precisely
the sort of core infrastructural element that could allow humanity to scale to
orders-of-magnitude larger processes with truly global organizations and coor-
dination mechanisms.
Blockchain technology simultaneously highlights the issue of the appropri-
ate administration of transnational public goods and presents a solution. Wikipe-
dia is a similar international public good that is currently subject to a local juris-
diction that could impose on the organization an artificial or biased agenda. It is
possible that blockchain mechanisms might be the most efficient and equitable
models for administering all transnational public goods, particularly due to their
participative, democratic, and distributed nature.
Coordination and Efficiency in Markets through Consensus-Building
Blockchain technology can facilitate the coordination and acknowledgment of

all manner of human interaction, facilitating a higher order of collaboration and
possibly paving the way for human/machine interaction at some level. Further,
blockchain technology is not just a better organizational model functionally,
practically, and quantitatively; by requiring consensus to operate, the model
could also have greater liberty, equality, and empowerment qualitatively. Thus,
the blockchain is a complete solution that integrates both extrinsic and intrinsic
and qualitative and quantitative benefits.
Despite the many interesting potential uses of blockchain technology, one of
the most important skills in the developing industries will be to see where it is and
is not appropriate to use blockchain models. Not all processes need an economy
or a payments system, or peer-to-peer (P2P) exchange, or decentralization, or
robust public record keeping. Further, the scale of operations is a relevant factor,
because it might not make sense to have every tiny micro-transaction recorded
on a public blockchain; for example, blog-post and tip-jar transactions could be
batched into side-chains in which one overall daily transaction is recorded. Side-
chains are more broadly proposed as an infrastructural mechanism by which
multiblock chain ecosystems can exchange and transfer assets (Back et al., 2014).
Especially with made to measure (M2M)/IoT device-to-device communication,

there are many open questions about the most effective ways to incorporate
market principles (if at all) to coordinate resources, incentivize certain goal-di-
rected behavior, and have tracking and payments remuneration. (Dawson, 2014)
Even before we consider the potential economic models for M2M/IoT payments,
we must work out general coordination protocols for how large swarms of devices
can communicate, perhaps deploying control system and scheduling software for
these machine social networks, adding new layers of communication protocols
like a “chirp” for simple micro-communications such as on, off, start, and stop
(daCosta, 2013).
Pragmatic Approach to Blockchain Implementation
There is an increasing amount of conversation related to the emerging technol-

ogy called by the now over-used name blockchain. It seems an ironic use of that
name, since much of the actual news these days concerning solutions under
development is likely not a blockchain solution at all, but a different form of
distributed ledger technology (DLT). If we can put semantics aside, the basis for
the excitement is based on the blockchain concept, which underpins the bitcoin
platform for a distributed and immutable ledger facilitating the exchange of the
virtual currency.
There are several DLT platforms that are receiving interest from the finan-
cial services community that leverage some aspects of blockchain. Among them
is Corda, which is being developed by R3, a fintech focused on DLT. A visit to
the Corda website finds that they do not call their platform blockchain, as that
word does not seem to even exist on their website. The message is clear that
the platform is designed for financial services—not surprising, as R3 has been
heavily funded by several large banks and others. The platform is designed to
not share all transaction data across the network, as the access to transactions is
restricted to only those needing to view or validate them on a case-by-case basis.
This access is limited to the parties to the transaction and potentially regula-
tors or central authorities. This form of private ledger does not share the vision
of bitcoin, the public network where the transactional history is shared by all
nodes. Corda supports multiple consensus algorithms, which provide flexibility
to comply with different regulators but also differs from the use of miners found
in the bitcoin world.
Another example are the tools being offered by Digital Asset Holdings. Digital
Asset utilizes a form of private DLT, Hyperledger, which is not a true Blockchain.
Like Corda, Digital Asset exists to support banking and capital markets and
Introduction 173
central authorities such as exchanges and central counterparties (CCPs). Like the
Corda platform, not all the transaction data stored on the Digital Asset platform
is replicated across all the nodes. This data is shared only by those involved in the
transaction. Digital Asset differs from other platforms as it employs a form of XML
called Digital Asset Modeling Language (DAML) utilized to develop Smart Con-
tracts, which automate the execution of contract terms related to the exchange
of assets that interact with the Hyperledger. However, a common thread among
these platforms and blockchain is the use of cryptography and some form of con-
sensus algorithm, such as Practical Byzantine Fault Tolerance (PBFT). PBFT is
effective in asynchronous environments such as the internet, where the need to
maintain high availability and provide the capability to recover from bugs, errors,
and malicious cyberattacks is critical.
There is some debate about the development of these private networks, as the
focus moves away from bitcoin to a continuous stream of new ventures, alliances
and projects on different platforms. The groundswell of excitement for a technol-
ogy such as blockchain has created an unsurprisingly opposite reaction as well
from cynics who are beginning to line up to rain on the parade. However, both
sides seem to suffer from the same hype.
The issue is that they are both looking at blockchain as something being
either black or white. Some supporters of this emerging technology believe,
unequivocally, that we are on the cusp of a disruption that will change the world
as we know it. On the other hand, there are the skeptics. While we would not want
to lump them all together, there are certainly some skeptics who are threatened
by the new technology. This includes those who may have some vested inter-
est, professional or financial, in alternative or legacy tools and technology, as
well as those who fear the focus is moving away from what they believe is the
promise that a true public blockchain can provide. Legitimately, there is reason
to be cynical from a technology perspective. But frontier technologies are built on
healthy skepticism and experimentation.
In the discussions about how the implementation of these private networks
such as Corda and Digital Asset are moving, the focus is away from the true decen-
tralized nature of the blockchain. Currently, there are several serious challenges
that cause impediments for the large-scale implementation of a true public block-
chain. There are issues with scalability and latency with the blockchain model
that utilizes cryptographic algorithms and shares the entire transaction history
across every node in the network. At the time of this writing, there are few viable
solutions to this problem, as most blockchain solutions do not provide the speed
that is available using current technology. Use cases involving equity trading
execution or card processing require execution cycles that DLT can not currently
provide. This explains why the current focus has been on creating post-trade pro-
cessing solutions, such as for securities or derivatives settlement.
Another challenge for the technology relates to privacy laws. Several nations
maintain data residency requirements. This means that any data that includes
personally identifiable information may not reside outside of their national
borders (Swan, 2015). Some other countries are not as restrictive but still limit
access to personal data requiring strict role-based permissions, data masking and
other techniques. These rules have an impact on the potential architecture, func-
tionality and the ability to implement a public blockchain solution. Additionally,
if we consider the use of a public blockchain that includes no central authority
and is anonymous, how can sanctions and antimoney laundering regulations
be monitored and maintained? This creates a major hurdle to obtain regulatory
approval of any solution having this issue.
Get it Going First

Obviously, there are several technical and regulatory issues that remain to
be solved before a true public blockchain model will become viable. So, what
becomes of the work developing private networks that is ongoing with Corda,
Digital Asset and others? There is much potential value to be gained from the
implementation of a private DLT platform. The implementation of some form of
DLT and Smart Contracts for the appropriate use cases may provide advantages
in efficiency and maintaining audit trails over other alternatives. However, when
considering any information technology (IT) implementation, it is important to
choose the appropriate technology for the business problem you are trying to
solve. The solution should never try to find the problem.
Thus, banks and other institutions must avoid considering use cases where
latency and other technical or regulatory limitations would affect the success of
the project. This may include maintaining the status quo by utilizing a central
authority to avoid additional and unnecessary regulatory entanglements. Cur-
rently, regulators are providing varying degrees of support for the implementa-
tion of DLT. The Monetary Authority of Singapore (MAS) is directly promoting
both securities settlement and cross-border payments using DLT technology. On
the other hand, while some regulators have voiced concern for existing rules
such as AML (antimoney laundering), most seem to be taking a more wait-and-
see stance. It is critical to perform the appropriate planning, including viabil-
ity and readiness assessments, prior to any potential rollout to ensure that the
appropriate use cases are considered and that the integration to legacy systems
is thoughtfully designed and executed. Institutions must be aware that business
Introduction 175
operating models and processes will be affected. Change management will also
be an important consideration.
The discounting by the cynics of efforts being made by those as varied as the
Depository Trust & Clearing Corporation (DTCC), the recently announced Enter-
prise Ethereum Alliance or MAS truly miss the point that this will be an evolution
and not a revolution. The fact that these platforms do not provide what many
consider a pure blockchain or are being implemented with a profit motive seems
to bother some in the blockchain community. Any new technology that is to be
implemented successfully on this scale will need investment from many parties.
It will need that investment in start-ups and by established players, such as Mic-
rosoft and IBM, to overcome the current technological challenges. It will need
investment from large institutions to spend portions of their IT budgets already
strained from maintaining legacy systems and trying to keep up with emerging
requirements of digital banking and changing regulations.
If we look back at the history of other technologies that have brought a para-
digm shift, many have taken time; even years to replace legacy business models
and systems. The development of a mature DLT platform will take time as well.
The current implementations of DLT clearly are not the blockchain that under-
pins the virtual currency bitcoin. The tools and platforms such as the offerings
from Digital Asset Holdings and R3 Corda are offered as a pragmatic answer to
a set of current business, technological and regulatory challenges. By imple-
menting the appropriate use cases the potential impact of the current challenges
inherent in the bitcoin example—including scalability, latency and privacy—will
be reduced. These challenges make the current public blockchain model a non-
starter for banks.
In other parts of the world, regulators have been providing regulatory sand-
boxes for financial technology, such as blockchain. The trend started in the UK
in February 2015 when the first Blockchain tech sandbox was launched. The
sandbox allowed businesses to test out new and innovative financial services
without incurring all the normal regulatory consequences of engaging in those
activities, according to the Financial Conduct Authority Director of Strategy,
Christopher Woolard, who have since been inundated with interest about their
sandbox.
Singapore’s Central Bank introduced a similar environment in August 2016,
launching a regulatory sandbox to allow local fintech companies to experiment
with their solutions. In November, the Thai Central Bank started a major fintech
promotion, launching a sandbox that included blockchain tech start-ups. While
designed for banks, non-bank technology firms with “sufficient capital and
human resources” were invited too.
Big-four professional services firm KPMG released a report1 attributing many

Asian investments in blockchain fintech to this global trend of regulatory sand-
boxes. The firm pointed out that the governments in Hong Kong, Australia, Indo-
nesia, and Malaysia all created or announced sandboxes for the banking sector
during the third quarter of 2016. The firm described the push as part of a greater,
worldwide embrace of fintech in general by governments and other monetary
authorities.
Overcoming Limitations of Blockchain
The blockchain industry is still in the early stages of development, and there
are many kinds of limitations. Ideally, the blockchain industry would develop
similarly to the cloud-computing model, for which standard infrastructure com-
ponents—like connectivity, processing, storage and management systems—were
defined and implemented very quickly at the beginning to allow the industry to
focus on the higher level of developing value-added services instead of the core
infrastructure. The current limitations are many but not insurmountable, and
include those related to technical issues with the underlying technology, public
perception, government regulation, and reported thefts and scandals.
Technical Challenges
One main challenge with the underlying bitcoin blockchain technology is scaling
up from the current maximum limit of seven transactions per second (the VISA
credit card processing network customarily performs 2,000 transactions per
second and can manage peak volumes of 10,000 transactions per second), espe-
cially if there were to be mainstream adoption of bitcoin (Lee, 2013). Some of the
other issues include increasing the block size, addressing blockchain latency and
bandwidth, countering vulnerability to mining attacks, and implementing hard
forks (changes that are not backward compatible) to the code. There have been
some significant advancements in this area as we speak.
Another significant technical challenge and requirement is that a full ecosys-
tem of plug-and-play solutions be developed to provide the entire value chain of
1 “Global VC-backed fintech funding declines in Q3’16, but Asia investment reaches new high:
KPMG and CB Insights.” KPMG, November 16, 2016. https://home.kpmg.com/xx/en/home/
media/press-releases/2016/11/global-vc-backed-fintech-funding-declines-in-q3-2016.html
Overcoming Limitations of Blockchain 177
service delivery (Swan, 2015). For example, there needs to be secure decentral-
ized storage, messaging, transport, communications protocols, namespace and
address management, network administration, and archives linked to the block-
chain ecosystem.
While it is possible that cryptotechnologies will see more adoption due to
their flexibility and wider scope of potential use within banks, the benefits that
distributed ledgers can bring to financial institutions and corporations will be
dampened if a critical mass of adoption is not reached. If one bank uses distrib-
uted ledgers and another does not, a trade transaction involving those two banks
will have to rely on legacy products and networks. Interoperability between dis-
tributed ledgers (as well as between distributed ledgers and legacy systems) will
be key to enabling network effects that can produce benefits for all stakeholders.
As banks and others look to the use of the blockchain in trade and finance, they
should focus on how to bring industry participants together to create a network
effective for blockchain-based platforms.
Business Challenges
At first traditional business models might not seem applicable to the blockchain
economy since the whole point of decentralized P2P models is that there are no
facilitating intermediaries to take a cut/transaction fee. However, some of the
many types of business models that have developed with enterprise software
and cloud computing might be applicable, too, for the blockchain economy—for
example, the Red Hat model (fee-based services to implement open source soft-
ware), and SaaS, providing Software as a Service, including with relevant modi-
fications. Optimistically, the new blockchain era could usher in new types of jobs
and opportunities.
Any solution will ultimately need to fit into an organization’s existing finan-
cial ecosystem. Considering this fit beforehand will improve the integration
process later, should the concept prove successful. Additionally, many techno-
logical partners offer different applications of distributed infrastructure technol-
ogy. Choosing the partner that fits a business need and desired configuration is
vital to the technology’s individual success. Data privacy is another technological
consideration. For example, while trading assets on an open blockchain may sig-
nificantly cut costs, it is not a practical solution if all transactions are observable
by all parties in the system. Consequently, the design of the technology itself will
need to be reviewed depending on the application of choice.
Furthermore, moving any product or service from a centralized to a decen-
tralized mode of operation will have vast impacts on an entire organization. A
business’ front office, operations, compliance, tax, accounting, legal, and tech-
nology offices are likely to be involved. Any strategic identification of opportuni-
ties to improve a business using this technology will therefore need to consider
the end-to-end operational impact of each solution.
Government Regulatory Challenges
The likelihood of a decentralized system to become commonplace is not obvious

as it would have to offer the same or higher level of trust and protection than
the current one. For this to happen, the system would have to possess a massive
amount of computer power and efficiently cope with the enormous energy con-
sumption required to support it. In addition, it is not clear how this system would
deal with legal and regulatory concerns, as well as with matters of national secu-
rity, such as money laundering, fraud, tax evasion or terrorism. Moreover, digital
currencies would not be exempt from potential crashes; like the current system,
if their usage reaches substantial levels, these shocks could generate systemic
risk and severe economic downturns. In this scenario, monetary policy would not
be able to respond effectively if it fails to boost demand among a large share of
economic agents that use digital currencies.
Regulatory approval can strongly impact the success of any distributed
infrastructure implementation. For example, developing a distributed ledger to
assist in the clearing and settlement of financial assets may involve custodial
considerations, especially if assets are considered to be held on the network at
any point. These custodial considerations may require a party to submit to regu-
latory requirements, which in turn could increase the compliance costs of such
a system. On the other hand, a well-designed, standardized, automatically rec-
onciled ledger could provide immediate real-time access to the relevant regulator
for all partner institutions on the network. This could prove to save considerable
costs and therefore outweigh the additional compliance costs involved in estab-
lishing the system.
One way to comfort regulators is to allow for permissioned access for reg-
ulatory audits. The sharing of data (be it with regulators, or other parties) can
be done through permissioned access via encryption keys. The access can be
granted by the blockchain owner (or system provider) for regulators (and other
verified authorities in a particular investigation or audit check) to view the related
areas where it would help in their duties. In these early phases of blockchain
implementation, the utopian version of a truly public and fully decentralized
blockchain system may have to wait until the regulators (and all other authori-
Overcoming Limitations of Blockchain 179
ties) become comfortable with the idea of a digital economic system with decen-
tralized operations.
Bitcoin and blockchain are themselves neutral; as any technology, they can
be used for good or evil. Although there are possibilities for the malicious use of
blockchain, the potential benefits greatly outweigh the potential downsides. Over
time, public perception can change as more individuals themselves have e-wal-
lets and begin to use bitcoin.
Privacy Challenges
There are many issues to be resolved before individuals feel comfortable storing
their personal records in a decentralized manner with a pointer and possibly
access via blockchain. The potential privacy nightmare is that if all your data is
online and the secret key is stolen, lost (forgotten) or exposed, you have little
recourse. In the current cryptocurrency architecture, there are many scenarios in
which this might happen, just as today with personal and corporate passwords
being routinely stolen or databases hacked. Any comprehensive solution must
include a biometric measure that forms a bridge across the physical-cyberspace
boundary. For complex, high value blockchain transactions, this legally reli-
able biometric connector will require a third party to confirm that the biometric
measure is indeed the one belonging to the physical-space identity. Addition-
ally, the blockchain application must incorporate a digital representation of a
person’s fingerprint, iris or retina pattern, or a photograph into the blockchain
transaction. This means that the person’s biometric information will not only
exist permanently in cyberspace, it will be stored on hundreds or thousands of
blockchain nodes, all beyond the control of the physical-space human being to
which it belongs.
However, despite all of the potential limitations with the still-nascent block-
chain economy, there is virtually no question that it is a disruptive force and that
its impact will be significant. The blockchain economy has provided new larg-
er-scale ideas about how to do things. Even if you do not buy into the future of
bitcoin as a stable, long-term cryptocurrency, or blockchain technology as it is
currently conceived and developing, there is a very strong case for decentralized
models—the internet decentralized information and established the Information
Age. The blockchain industry is one of the first identifiable large-scale implemen-
tations of decentralization models, conceived and executed to scale the complex
levels of human activity, possibly even those that have yet to be imagined. Pro-
gressing toward decentralization of economic transactions would make future
economic activities less restrictive and increase efficiency. Centralized systems
may exist on top of the decentralized system but they will be few and will act as
forms of governance or administrators. For governments and corporations that
means massive cost reductions, like reducing banks’ infrastructure costs attribut-
able to cross-border payments, securities trading and regulatory compliance by
between US$15 and 20 billion per annum by 2022. For the society, this translates
to better access, transactional efficiency and savings. For Islamic finance, instead
of developing new rules to control speculative and unrestrained reckless behav-
iors, blockchain embeds such governance measures within its technology as well
as Islamic virtues that uphold the values of trust, honesty and transparency, and
those that require fulfilling of obligations and responsibilities.
References
Back, A., Corallo, M., Dashjr, L., Friedenbacj, M., Maxwell, G., Miller, A., Poelstra, A., Timon,
J., & Wuille, P., (2014). Enabling Blockchain Innovations with Pegged Sidechains.
Blockstream White Paper.
daCosta, F. (2013). Rethinking the Internet of Things: A Scalable Approach to Connecting
Everything. New York: Apress, 2013.
Dawson, R. (2014). The New Layer of the Economy Enabled by M2M Payments in the
Internet of Things. Trends in the Living Networks, September 16, 2014. http://
rossdawsonblog.com/weblog/archives/2014/09/new-layer-economy-enabled-
m2mpayments-internet-things.html
Ferrara, P. (2013). Rethinking Money: The Rise of Hayek’s Private Competing Currencies. Forbes,
March 1, 2013. http://www.forbes.com/sites/peterferrara/2013/03/01/rethinking-money-
the-rise-of-hayeks-private-competing-currencies/
Lee, T.B. (2013). Bitcoin Needs to Scale by a Factor of 1000 to Compete with Visa. Here’s How to
Do It. The Washington Post, November 12, 2013. http://www.washington post.com/blogs/
the-switch/wp/2013/11/12/bitcoin-needs-to-scale-by-a-factor-of-1000-to-compete-with-
visa-heres-how-to-do-it/.
Swan, M. (2015). Blockchain: Blueprint for a New Economy. O’Reilly Media, Inc.
Chapter 8
Response of Islamic Financial Institutions
Introduction
Undoubtedly, fintech growth is unstoppable but understanding the future of

fintech requires a re-engineering of how banks operate and in-depth analyses of
its customer experience. E-commerce businesses like Amazon, Apple, Facebook,
and Google prove that smart data management can create a customer under-
standing like no other. Across retail, wholesale, and capital markets, banks are
keenly aware that the digital-first model based on high-performance data anal-
ysis will create a massive advantage. This chapter will discuss the key success
determinants to remain competitive in the global market for Islamic financial
institutions (IFIs) with the use of fintech. It will also elucidate the challenges,
which the Islamic finance industry may face in the adoption and implementation
of new tech. Finally, we end with a proposal for a collaborative approach for IFI
in order to harmonize strategies and adapt to the rapidly changing landscape of
the market.
Important Success Factors in this Era of Digitization
Better Customer Experience with Customer Centricity
Customer centricity has been one of the driving innovations in financial services,
and this is also true for the Islamic finance industry. Tech-savvy digital consum-
ers want more personalized services that enhance convenience and improve
security. Shifting from product thinking to customer-centric offerings demands
speed, agility, and the ability to innovate. Monetizing social media platforms
have emerged as opportunities to diversify firms’ income by engaging millennial
consumers. Digital experience will draw people into continual virtual engage-
ments and online transactions.
Customers are reshaping and redefining their expectations, taking their cues
from several industries that provide multichannel access, seamless integration,
product simplicity, and “segment-of-one” targeting.1 In the last few years, it
1 “Segment-of-One Marketing” is the ability to track and understand individual customer be-
havior.
DOI 10.1515/9781547400966-008
182 Chapter 8: Response of Islamic Financial Institutions
became clear that customers wanted to be able to do everything on their mobile

phone, including applying for a bank account, or insurance claim. They want
personalization, convenience, accessibility, and ease of use. They wanted to
feel like their bank was anticipating their needs, not crafting product offerings
that made sense only from the banks’ bottom-line perspective. They expected
no surprises and demanded transparency in terms of fees. Seventy-five percent
of PricewaterhouseCooper’s (PwC’s) survey respondents from the banking and
fintech sector saw an increased focus on the customer as the most important area
of impact to their business.
King (2014) forecasted that the future of the bank will have a very differ-
ent organizational structure. He further argued that the entire customer facing
organization and supporting platform needed to change radically. As customer
expectations are changing, companies are forced to adapt. It is expected that in
2020, companies must focus on using big data to predict customer decisions and
make such intelligence accessible throughout the enterprise. In the future, cus-
tomers will want to do business with firms and companies that offer a consistent,
informed and greater experience across all channels of communication, taking
into consideration that customers will have different preferences.
There is fierce competition among banks and financial institutions to provide
the most seamless services at the lowest price, to retain loyalty, and win new busi-
ness. They are aware that providing customers with experience-rich banking and
placing them foremost is essential for success. Those who manage and embrace
the customer-centric approach will thrive in the market (Dharmesh, 2016).
Agility and Scalability
Agility is one of the most discussed and crucial attributes of successful fintech
companies. The point of agility is the ability to adapt and be nimble in the envi-
ronment of competition, unexpected and unanticipated changes and oppor-
tunities. For an organization, agility is needed to thrive and take advantage of
changes by quickly assembling its organizational parts: technology, employees
and management, in order to take advantage of an opportunity. In this way, any
organization can cater to the needs of their customers in a changing and turbu-
lent environment in an effective and deliberate way (Goldman, 1995).
Scalability is the capability of an entity to grow and to expand across markets.
It also includes the ability and capacity of the technology to expand or accept
expansion to perform the increased workload without compromising efficiency,
and effectiveness. It is dealt with through networks, systems, and processes.
Important Success Factors in this Era of Digitization 183
In organizational and business perspectives, scalability is most important to

meet the demands of the market. It allows companies to reach new markets that
would have required them to open a satellite office or a branch in a geographical
location whose market they may not be familiar with, along with new employees
that are not proven. Scalability allows businesses to expand across boundaries
with a single team that can be based at the headquarters, where the company was
originally founded, or regionally, if a presence in an area is of value.
Islamic banks need agile product and technology development skills to
bring new products and capabilities to the market much quicker than today.
This requires continual iteration, real-life pilot testing, and rapid learning from
customers.
Building the Ecosystem
To foster the fintech or Islamic fintech industry, there is the need to establish an
innovation ecology. Stefik and Stefik (2006) explained this term as: “An inno-
vation ecology includes education, research organizations, government funding
agencies, technology companies, investors, and consumers.” Digital innovation
will drive innovative products and services to the end users. It can also make
products and services cheaper and more accessible for the unbanked and under-
banked population.
The main entities within the innovation ecosystem are the regulators, Islamic
fintech companies, IFIs, venture capitalists, government agencies, strategy
and technology consultants, media and academia. These entities make up the
demand and supply sides of the digital ecosystem. Every crucial component gives
support to each other and strengthens each other for the attainment of common
and collective objectives. Each party plays its role and uses its resource and capa-
bility to provide solutions. Regulators may provide innovation-friendly policies
and an environment that gives incentives to Islamic fintech platforms to test and
refine their innovative ideas, and IFIs may provide financial services or access to
their internal sources and financial expertise. Incubators and regulatory sand-
boxes allow for the trial of prototypes in a controlled environment, while the
media and academia may provide insights into trends and conduct proof-of-con-
cept research to determine viable solutions for the gap in the industry. Managers
must ensure their organizations can pivot with market shifts, even dropping or
switching partnerships if the going gets too rough. The ability to adapt to new
conditions will be a driving factor in maintaining the digital ecosystem, as part-
ners and suppliers change and customer needs evolve.
Figure 8.1: The Various Components to the Islamic Digital Ecosystem
Developing partnerships with a range of actors in the Islamic digital ecosystem

(see Figure 8.1) adds strength to the community and can be a strategic way for
organizations to add value to existing efforts or shore-up their areas of shortcom-
ing and deficiencies. Investments in core and emerging technologies will ulti-
mately define the DNA of the ecosystem. Cloud services, analytics, node archi-
tecture and servers, cybersecurity and talent development should be the biggest
planned investments in technology.
Cybersecurity Management
Cybersecurity is paramount to rebuilding trust and confidence that previous

financial crises have eroded. Successful financial institutions will have invested
considerably in this capacity. Recent high-profile security breaches and media
commentary surrounding cyberattacks have bred fear and hesitation, further
eroding stakeholder trust. There are now higher expectations about security of
information and privacy among clients, employees, suppliers, and regulators.
These risks include the internal misuse of social media and organized cyber-
crime (e.g., mass information theft, or denial-of-service attacks). This makes the
fintech industry more vulnerable to cyber threats and attacks. Different reports
Challenges for Islamic Financial institutions 185
(CB Insights, 2018; PwC, 2016c) show that cybersecurity management is the top
concern of stakeholders of the fintech industry and also the traditional financial
industry who are seeking to hire or build in-house fintech outfits or want to col-
laborate with proven fintech entities. Cybersecurity also attracts regulators to dig
deeper into this matter that combines fintech and RegTech (Arner, Barberis, &
Buckley, 2016).
The combined use of blockchain, big data, and artificial intelligence (AI) can
lead to a better, more sophisticated and integrated cybersecurity system, which
is adaptable and effective. In addition, one of the major challenges from the end
users is lack of awareness of cyber or digital risks (Villasenor, 2016) and also their
negligence in taking precautionary measures while accessing financial services
through digital channels. Awareness programs to educate users are helpful to
manage the common cybersecurity risks.
For Islamic banks and institutions, a proactive response is vital. Key priorities
include identifying and focusing resources on the business areas most in need of
protection. By 2020 leading banks will have developed cybersecurity strategies
that are aligned with their business objectives, risk-management protocols, and
regulatory requirements. Many existing IFIs lack the resources to tackle these
issues on their own, and, hence, will have to partner with qualified third parties
with a full understanding of security requirements.
Challenges for Islamic Financial institutions
Regulatory Issues
Due to technological advancements and innovative models, the landscape of

the financial industry is changing so spectacularly that it is completely trans-
forming and shifting the world economy (Hayen, 2016). This dynamism in the
world economy demands a dynamic and a new set of regulations to foster and
regulate the growth of the fintech industry according to fair play, rule of law and
best practices. According to International Data Group (IDC), it is estimated that
the banks, investment banks and insurance companies globally are investing
around US$85 billion just for the provision of regulatory oversight, legislative
initiatives and risk control.
The rule-making process also needs some changes due to its present glacial,
unidirectional, and inflexible nature. An agile and results driven process of
rule-making is important to set rules and boundaries for the ever-changing envi-
ronment of finance, in particular, for the Islamic fintech industry (Brummer &
Gorfine, 2014).
Regulatory support provides an ecology that helps to foster and promote

the new or young entrepreneurs and also other Islamic financial institutions to
test their innovative business models. In a few Islamic countries, like Malaysia,
its central bank, Bank Negara Malaysia (BNM) is doing well in terms of creating
an innovation-friendly regulatory environment, which can be observed from its
well-established fintech (including the Islamic) ecosystem.
Likewise, it is advisable that other organizations like international Islamic
financial forums and influential entities, like AAOIFI, IsDB, IFSB, ISRA, and
IRTI start sharing and discussing new ideas and collaborate with Muslim entre-
preneurs to enhance regulations, which can support further growth of Islamic
fintech ecosystems worldwide. It is heartening to see that in the second half of
2017 and in 2018, events like the 2nd World Islamic Finance Forum, Blockchain
and Waqf have placed fintech as their main themes in their forums. These are
indeed encouraging signs that signal awareness and acceptance. Such initiatives
provide avenues for regulators and governing authorities to discuss the complex
multidimensional issues faced by the Islamic fintech industry and begin engage-
ments with the industry on viable and practical regulations for the industry. Reg-
ulators do not want industry players just adhering to rules, or checking boxes but
rather, they want them to embrace regulatory intent, and create sound, secure,
unbiased businesses, where regulatory compliance and sound conduct is embed-
ded in the processes and values of everyday operations.
Moving forward, the industry could come to a consensus on a set of pruden-
tial regulations for Islamic finance (including fintech), which can be applicable
in all regions. The formation of consortia and alliances among IFIs, fintech plat-
forms, academia, and regulatory authorities can be a good step forward.
Comfort Zones and Stagnation in Management
The hard regulations and legacy culture in an organization are infused with each
other. This impedes the path of an organization to move forward especially when
it comes to the path of innovation. This culture of layering and folding of man-
agement in decision-making traps an organization in the ropes of stagnation.
Risk averse behavior of management becomes more complex when diffused from
lower to top management. Fintech provides for quicker, more informed decision
making and calculated risk-taking behaviors.
Fintech focuses on access and control of the customers’ financial trans-
actions, and Islamic fintech will provide the personalization of finance to the
customers by using digital channels and innovative business models within the
deployment of big data, AI, and blockchain. The process from inception and
Challenges for Islamic Financial institutions 187
opening of an account or executing an investment to the final rewards and other

financial transactions can be directly controlled by the end users in fintech
solutions.
In a financial organization that is encumbered by layers of management, it is
not easily possible to do experimentation for new innovative products and busi-
ness models. Getting approvals alone will take ages. In addition, experimentation
involves failure and the fear of failure results in the lack of support of innovation.
It is a fact that without experimentation in this era of digitalization, financial
institutions will fail to compete and will not be able to provide the services and
products, which the consumers expect.
The Islamic financial industry appears to be slower in the adaptation and
experimentation of digitization. There are a number of conventional institu-
tions like CITI bank, Barclays, Bank of England (BOE), and so forth, which have
already made innovation labs and incubators to conduct in-house experimental
trials by deploying advanced technologies, that is, big data, AI, and blockchain,
etc., at different phases. But, IFIs are not showing agility and activeness in this
regard. Management of IFIs need to give priority to transforming their organiza-
tions because disruptive change is inevitable and it is happening fast. IFIs need to
create incentives for innovation and consider how all partners and suppliers con-
tribute to their business development. Partners will drive innovation and growth
as the businesses adopt, consume, scale, and leverage innovation for greater
market share leadership.
For example, a leading financial services company turned to agile software
development to support its goal of organizing around customer experiences rather
than products (Olsen et al., 2017). In doing so, it sharpened the focus on raising
speed to market and ensuring consistently high customer loyalty scores for sales
and service delivery, especially in predominantly digital channels. The company
uses agile, cross-functional teams of eight to ten people, aligned to specific cus-
tomer episodes. Each team brings together the requisite capabilities in business,
design, processes, and technology. The company now is taking its experience-led
agile approach to scale across the enterprise, through waves of applied learning
sessions, and is well on its way to improving productivity by three to four times.
Lack of Talent
Since the beginning of Islamic banking and finance in 1970s, one of the major
challenges this industry is facing is lack of skilled talent. Financial Accreditation
Agency of Malaysia claimed that in Malaysia, there is the need and demand of
approximately 56,000 additional people in the Islamic financial industry by 2020
(WIEF, 2017). Obeidat (2016) also highlighted in his research about human capital
in Islamic finance that the sustainability and competitiveness of the Islamic finan-
cial industry is highly dependent on the skills and talents of its human capital.
The fintech industry is bringing together information technology (IT) pro-
fessionals, data scientists, entrepreneurs, programmers, etc., to the financial
services industry. This entry of new and diverse skilled people in the circle of
the financial services industry makes the fintech industry more diversified and
innovative but also somewhat complex. The additional requirement of Shariah
expertise and Islamic economics/finance understanding further narrows talent
availability. An ideal leader of an IFI would have to be someone adept in busi-
ness, economics, finance and the Shariah as well as have a technical understand-
ing of new technology.
One way to overcome the dire need of skilled and talented human capital,
could be to increase the production of skilled human capital through effective
education of intellectual capital in academia and research. The need to bridge
academic curricula to the needs of industry is also critical to bring much needed
solutions to real problems. Although there are a number of institutions that
have already began running courses as part of degree programs in conventional
fintech, there are none in Islamic finance programs. There is not a single course
on fintech with regards to Islamic finance (ICD &Thomson Reuters, 2017). This is
indeed very alarming and requires immediate resolution. When fintech and inno-
vation programs are in place, there should be industrial attachment programs for
tertiary students in the form of internships, project collaborations, and exchange
programs. For the public or older folks who seek alternative career paths, coding
academies need to be developed to skill those interested in coding and program-
ming. It is fairly obvious that as the finance industry gets disrupted, the redun-
dant professionals lose their jobs but the disrupters continue to employ coders,
programmers, various IT specialists, and data scientists.
At the university and think tank levels, there should be more collaboration
across disciplines, and collaborative cross-training and interdisciplinary research
programs to complete the fintech ecosystem to supply quality and knowledgeable
talents.
At the bank level, as automation pervades more activities, their workforce
must evolve. Thousands of roles are becoming obsolete, including tellers, back-
office processors—even routine call-center agents, as chatbots and robo-advisors
take on simple inquiries. Conventional technologies have helped banks to double
labor productivity every few years through digitalizing processes and apply-
ing more sophisticated industrial methods like capacity planning and lean six
sigma. Opimas, a research firm, estimates that by 2025, the rollout of AI tech-
nology by financial institutions will reduce employment in the capital markets
Collaboration Models for Islamic Financial Institutions 189
by 230,000 people, with the largest impact in the asset management industry,
where machines will replace around 90,000 people (Olsen et al., 2017). Taiger, for
instance, combines machine learning with natural-language processing to auto-
matically identify, extract, cleanse and validate pieces of information from many
types of documents. The banking applications include client onboarding, due
diligence and combating money laundering. After a large European bank shifted
to Taiger’s technology for client onboarding, its cost fell 85% and turnaround
time shrank from several weeks to seven minutes, with no loss in quality. As AI
spreads throughout the industry, bank professionals who previously performed
those activities will have to upgrade their expertise to remain relevant.
The greatest talent challenge for IFIs is attracting technical specialists. There
is a worldwide shortage of talent in advanced analytics, new technologies such as
blockchain and customer experience design. The shortage is worsened by com-
petition from more attractive fintech start-ups and companies that are building
interesting solutions. Banks will have to get creative in attracting and nurturing
top talent, through incentives such as elevating top performers into key roles with
more latitude and flexibility for further innovation, while adapting their respec-
tive organizational cultures to manifest this new reality.
Collaboration Models for Islamic Financial Institutions
Interoperability, coordination and collaboration are the essential elements of any

developed and successful ecosystem around the globe. This involves different
governments, public and private sectors indigenously and outside the region.
Public and private sectors can establish safe, secure, reliable, and affordable
open and shared platforms for digital payments, banking services and other
financial alternatives by converging their offers via omnichannels (offering the
customers integrated consistent financial platforms), including decentralized
shared ledgers. This will work as the catalyst of financial inclusion and will also
enhance the adoption of basic and primary financial services at a larger scale.
This trend of interoperability, coordination and collaboration is pervasive
and is prevailing around the world. For example, the Postal Savings Bank of China
(PSBC), China’s largest lender having a branch network of 40,000 branches, has
deepened cooperation with Ant Financial and Tencent in internet and mobile
finance. The online banks also aligned with the Chinese government’s policy by
providing access to financial services to the unbanked Chinese (Duflos, 2015).
Peer-to-peer (P2P) lenders Jimubox, RenRenDai, and Minshengyidai and China
Minsheng Bank are helping each other to manage and safeguard funds of inves-
tors (Ernst & Young EY, 2016). Dianrong.com and the regional Bank of Suzhou set
up a collaboration agreement in 2014 to target small enterprises (Finextra, 2014).

More examples exist around the globe.
Interoperability, coordination, and collaboration involve different branches
of the government, public and private sectors, indigenously as well as outside the
region. Public and private sectors can establish safe, secure, reliable, and afford-
able shared platforms for digital payments, banking services and other financial
alternatives by converging themselves via digital omni channels. This will work
as the catalyst of financial inclusion and will also enhance the adoption of basic
and primary financial services at a larger scale to those who may not have had
access previously.
A comprehensive analysis of different models of collaborations between
fintech companies and banks has been done in two reports provided by (EY, 2017;
TheCityUK, 2017). Different collaboration models are explained and discussed in
these reports. Some of the prominent models are as follows:
– Hackathons:
This model is not very formal, and usually is a fun way to invite start-ups and
fintech companies to provide a solution on a particular use case or business
challenge. Hackathons typically take place in teams and groups of coder-en-
trepreneurs and programmers. In these events, the organizers set off to test
early-stage protypes and ideas in an attempt to solve specific problems and
offer solutions. IFIs can get quick and innovative solutions through these
kinds of events while fintech companies get to pitch their ideas and take a
shot at getting funded or recruited. An example of this model is the LGB inno-
vation lab set by the Lloyds Banking group to test prototypes and find solu-
tions to their operational issues.
– Start-up Corporate Accelerator Model:
In this model, fintech companies submit their applications to IFIs to propose
solutions or innovation to existing problems in the form of products or ser-
vices. IFIs then short-list a number of fintech applicants to further develop
the proposed innovative services and products. They work together in twelve-
week programs where every aspect of the solution is refined and perfected
through industry experts’ mentorship and internal sources that IFIs are
willing to provide. Beyond merely a collaborative arrangement, this model
eventually involves equity agreements where IFIs take equity stake in the
fintech companies that successfully graduate from their intensive accelerator
programs.
– Enterprise Solutions:
In this model, IFIs select products or services developed by a fintech vendor
and test them in focused groups or preselected group of customers. Upon suc-
cessful trials, the IFI then scales up the product to its wider market segment.
This is a straight-up commercial type of collaboration in which both parties

work toward an enterprise solution that can be disseminated throughout the
business organization.
– Model of Corporate Venture Capital (CVC):
CVC is the investment of corporate funds directly in external start-up com-
panies. This is a simple arrangement in which the IFI takes a minor stake
in one or many up-and-coming fintech companies, to secure access to inno-
vative products and services once these fintechs come into the market and
start operations. According to the 2017 CB Insights Corporate Venture Capital
Report,2 the number of new CVC firms making first-time investments reached
record levels in 2017. One hundred and eighty-six new corporate venture
capital (VC) units globally made their first investment in 2017, including
stock exchange Nasdaq Ventures, and life insurance provider Northwestern
Mutual, among others. Compared to 2016, the number of new corporate VC
units making their first investment increased 66%, up from 112.
– Hybrid Model:
Hybrid model combines two or more than two models in a manner that IFIs
and Islamic fintech platforms will get benefits and share the rewards of col-
laboration and cooperation. This may include a collaborative agreement
based on support and cooperation, and also a commercial agreement that
may be based on any other model like CVC, Start-up Corporate Accelera-
tor model. Hackathons also can help IFIs to attract innovative and creative
minds who can create much-needed solutions. In a hybrid model all involved
parties can reap more benefits and also reduce risks and uncertainty regard-
ing intellectual rights, ownership, costs and profits.
Islamic Fintech is Opportunity for Islamic Financial Institutions
The report provided by Accenture (2016) shows that banks are now recogniz-
ing that fintech companies typically pose more of an opportunity than a threat.
The same results are also found in a survey conducted by Finextra and Dove-
tail (2017). The majority of the surveys’ respondents think that fintech is a great
opportunity for the financial industry. In another report (PwC, 2016a) when the
respondents were asked a question regarding the main opportunities related to
the rise of fintech, majority of the respondents said that fintech reduces costs
and improves customer retention. Similarly, in another survey also conducted by
2 https://www.cbinsights.com/research/report/corporate-venture-capital-trends-2017/
PwC (2016c) insurers concluded that the most significant gain from fintech is cost
reduction and disintermediation. The report also identified that although people
need finance for various reasons like health, education, and setting up small
businesses, they can not be served by Islamic banks with their existing product
structures and assessment of customer credit ratings. The paper also highlights
the geographical footprint of Islamic banks, which shows that they are primarily
operating in big urban cities. Finally, it is argued that most of the Islamic banking
debt-based products are close, but relatively expensive, substitutes for conven-
tional banking in terms of financial costs (Shaikh, 2018).
Islamic fintech poses great opportunities for the IFIs. In a recent survey con-
ducted by Council for Islamic Banks and Financial Institutions (CIBAFI), the
majority of respondents from the Islamic financial industry agree that Islamic
fintech is a great opportunity for IFIs in terms of cutting costs and offering inno-
vative products and eventually reaching the unbanked Muslim population (Viz-
caino, 2018). For Southeast Asia, fintech can play the role of change agent toward
financial inclusion. According to KPMG,3 only 27% of the region’s 600 million
people have a bank account (as of April 2016). This implies that 438 million people
do not have access to traditional financial services in this region and in poorer
countries like Cambodia, only 5% have bank accounts. This is one of the major
reasons for sustained poverty in the region. Notably, Southeast Asia has a higher
than global average mobile phone penetration rate. Financial services provided
by fintech companies over the mobile phone, such as money transfers at low-cost
and short-terms loans, could help to bring people out of poverty in the region.
According to the KPMG report, reaching the unbanked population in Association
of Southeast Asian Nations (ASEAN) could increase the economic contribution of
the region from US$17 billion (2016) to US$52 billion by 2030. Fintech start-ups
have the potential to usher in serious social change in the region.
Collaboration is Better than Competition
It is paramount for traditional IFIs and Islamic fintech to meet the needs of digital
transformation and keep on the track of journey of innovation to remain relevant
and sustainable.
Traditional IFIs are considered slow in reaction to changes due to many lim-
itations, including additional Shariah regulatory controls and risk averse culture,
3 https://home.kpmg.com/xx/en/home/insights/2016/04/FinTech-opening-the-door-to-the-un-
banked-and-underbanked-in-southeast-asia.html
which do not tend to plague their conventional counterparts. However, IFIs do

have some key advantages, if they but recognize them. They have, over a rela-
tively short period of time, built customers’ trust, a large network of interested
individuals, ethical businesses and financing resources. To adapt and remain
competitive, Islamic banks have to overcome old business models, which can not
be modified by implementing new strategies. In short, the fastest way to evolve
is for the traditional financial institutions to embrace new partnerships and col-
laborations with younger and forward-looking start-ups and fintech developers
who provide the technological skill-sets to reinvent the future of banking and
financial services.
Open Platforms
The traditional approach and model of innovation is called closed innovation.

This is a model of innovation where organizations use their limited and internal
resources, systems and human power to take initiative and implement their ideas
(Fasnacht, 2009). The new paradigm of innovation is called open innovation.
Open innovation has gained a lot of attention from scholars in the past decade
(Mina et al., 2014). The match of open innovation with technological revolution
and financial industry’s strategy also became the mouth piece at conferences
and seminars, etc. Open innovation authors and scholars mainly focused on the
demand and need for the financial organization to surpass their limitations and
internal boundaries for accepting and sourcing the paths of knowledge, technol-
ogy and opportunities (Felin and Zenger, 2014).
For IFIs and also for the Islamic fintech industry, it is noteworthy to give
importance and emphasis to open innovation as a central strategy. This brings
more efficiency in the operations of an organization throughout the whole
process of a customer-centric product development. Also, open innovation is a
major element of the collaborative business model, which enables organizations
to be flexible and enhance their competitive advantage through leveraging exter-
nal sources of knowledge, technology, and expertise.
Open Banking or Financial Platforms

The business model of the bank of the future will progress toward an open
banking system. Open banking means a platform-based business approach where
data, processes, and business functionality are made available to an ecosystem of
customers, third-party developers, fintech start-ups, or other strategic partners.
The financial services provided may come from banks as well as third parties,
like private investors on crowd-funding platforms, HNWIs, venture capitalists or

private equity firms. These platforms can be owned by the financial institution or
by an enterprising entity (others).
The financial institution owns the platform

In this platform, the banks develop and own their digital platform where financial
products and services from the bank, or not (i.e., from third parties), are offered
to the bank’s customers. They provide basic offerings and additionally source
and/or resell (niche) third-party services, integrating those services in the offer
(or redirecting consumers to the third party, that is, a broker business model).
This model requires the bank to master the technical integration of the applica-
tion program interfaces (APIs), as well as processing and analysis of third-party
data (as in account aggregation). They will have to manage client relationships,
including touchpoints through user interface and user experience (UI/UX), while
having the ability to offer “a digital marketplace” where third parties can show-
case their products and services to the bank’s customers. An example is Royal
Bank of Canada teaming up with Wave (a fintech outfit) to integrate account-
ing, financial and invoicing insights into its online business banking platform.
Or Royal Bank of Scotland launching its own automated lending platform in
response to the emergence of P2P lending platforms, which was developed by a
white-label fintech company called Ezbob.
Other ownership of the platform

In this model, the IFI has to develop a niche product expertise area. It has to
position itself as the leading supplier of a particular product or service (e.g.,
credit financing) on third-party platforms. This strategy requires them to be nar-
rowly focused yet offering such products or services on multiple other platforms,
which require preferred agreement or partnerships with the hosting platforms.
An example is Transferwise, which offers international money transfers (multi-
currency) in a quicker and cheaper way than traditional banks. Such value will
replace money transfer facilities in banks (and elsewhere, like Western Union) as
Transferwise gains traction and expands to other platforms. AliPay and Amazon-
Pay are examples that focus on payments, and WeChat on P2P mobile payment.
Fundamental to adapting to the shifts toward the future of financial services and
banking, Islamic banks and financial institutions need to:
A. Create the right platform or select the best-fit ones, that is, those that bring
the best customer experience or provide the best personalized services (the
right service or product at the right time). Those institutions who are able to
Conclusion 195
develop winning platforms through the right use of technology and the right
partnerships suited for the products and services will be successful. This can
be achieved through deep learning on customers’ behaviors through big data
analytics and machine learning.
B. Develop adaptive and agile responses to changing business environment.
Traditional banks are focused on minimizing risks, while today’s custom-
ers demand that already, they also expect speed and creative customization
to existing products and services. The impact of digital transformation in
banking will require Islamic banks to rethink the way the financial ecosystem
operates and functions, with a new set of capabilities and closer partnerships
with highly agile start-ups and third-party vendors or developers.
Beyond maintaining a strong, independent risk management function that is

focused on the core financial risks that banks face, sufficient oversight of opera-
tional and reputational risk will be critical.
– Cybersecurity is now at the top of everyone’s mind as new technologies, like
mobile, expose customer data to greater risks.
– Vendor risk will need to be managed more closely. Islamic banks have many
partners, and are responsible and accountable, from all aspects of operations
and governance.
– Islamic banks have become information hubs and potential targets as gov-
ernments ensure the proper payment of taxes, compliance with Shariah and
KYC/AML/CTF laws, sanctions, etc.
– Increased regulatory requirements such as stress testing and IFSBs drive
greater operational and reputational risk. Islamic banks will need to be able
to report detailed information on portfolio metrics, trends, and be able to
rapidly model alternative scenarios.
– Risk management will expand and interact more closely with every area of
the bank including marketing, product development, business analytics and
compensation. This requires a more robust end-to-end view of the business,
and an expanded skill set within the risk organization.
Conclusion
Disruptions in banking are pushing all banks (conventional and Islamic) to take
more explicit strategy decisions. Many banks have recognized that they need a
truly differentiated strategy as the industry’s economics have come under pres-
sure from new technology and nontraditional entrants with disruptive business
models. Large nonfinance technology firms have also been moving into markets
such as payments, raising customers’ expectations for better digital tools and
simple, convenient service. Ever-stricter capital and liquidity requirements by
regulators have reduced banks’ own balance sheet leverage. Low interest rates
and low economic growth intensify this pressure that weighs on them.
Difficult as strategic choices may be, banks are finding it even more challeng-
ing to adapt their operating models quickly to a new strategy—indeed, it is often
the biggest obstacle to implementing a distinctive strategy. At present, much
effort and money go into operating legacy processes and dealing with regulatory
requirements to keep the bank running. Gartner estimates that banks on average
spend roughly 60% of their IT budgets to maintain legacy IT systems as compared
to just 24% to grow the business and 16% to transform it (Olsen et al., 2017). The
global financial crisis, moreover, prompted a greater scrutiny of fiduciary duties,
and created mistrust in the banks’ legacy talent, systems, and processes, which is
being overhauled by the current disruptive revolution.
The promise of blockchain and fintech creates the possibility of coordinat-
ing our transactional activities through a multi-strength mechanism of trust and
transparency within the now globalized economy. Blockchain is the technology
that would operationalize the mechanism of trust as we progress from personal
exchange to impersonal exchange without an intermediary. We suspect that the
blockchain technological backbone will be commonplace in four to six years’
time, through the proliferation of cryptocurrencies, smart contracts, full-reserve
lending platforms, multicurrency money transfers, public registries, document
consolidation and other processes that are yet to be imagined.
From a broader perspective, fintech will overcome conventional ways of
banking/finance/insurance in the coming years and if Islamic economies do not
embrace it and develop their own technological ecosystem, they will lose the
unprecedented opportunity to level up a 450-year gap in finance that has long
suppressed them. The adoption of all forms of financial technology will allow
Islamic finance to adapt to the changing landscape of modern economic transac-
tions and carve its own niche in the future digital economy.
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Index
A Applications 49–50, 52, 56–62, 64–66,
AAOIFI (Accounting and Auditing Organization 71–72, 104, 115, 134–35, 177
for Islamic Financial Institutions) 85, Apps 37–38, 56, 119, 153
87–88, 186 AR (augmented reality) 35, 169
ABA (American Bar Association) 165, 167 Arner 16, 18, 21–22, 44, 185, 196
Abu Dhabi Global Market. See ADGM Artificial intelligence 8, 15, 24, 49, 63, 67,
Academia 92, 183, 186, 188 69–70, 114, 117
Accenture 57, 66, 111, 191, 196 ASEAN (Association of Southeast Asian
Accidents 150–51, 153 Nations) 9–10, 192
Accounting and Auditing Organization for Asia 13, 22, 25–27, 40, 66, 78, 86, 148
Islamic Financial Institutions. See AAOIFI Asian investments in blockchain fintech 176
Adaptation 105, 107, 187 Asset management 55, 66, 94, 153
ADGM (Abu Dhabi Global Market) 103, 107–8 Asset purchase 80, 158
Adoption 4–5, 7, 40, 60–61, 95–96, 148, 155, Assets 19, 21, 30, 41, 44–45, 55, 61–63,
177, 189–90 120–21, 158
Advanced technologies 4, 7, 14, 22, 49, 54, –––real 41
56–57, 69, 103 Association of Southeast Asian Nations
Advancements 6, 20, 116, 176 (ASEAN) 9–10, 192
–––technological 3, 17, 49, 161, 185 Attacks 44, 184
Africa 13, 22, 27, 93, 107, 115, 127, 149 Authenticity 151, 153–55
Agility 10, 22, 35, 49, 105, 107, 181–82, 187, Automated teller machine (ATMs) 17, 27
198–99 Automates 104, 116, 118, 159, 165, 173
Agility and adaptation 107 Automation 16, 64, 69, 116, 118, 140, 142,
Agreements 37, 71, 92, 95, 103, 129, 139, 143 164–65
Algebra 73, 86
Algorithms 65, 73, 114, 117, 119, 141 B
Alipay 37, 39, 97, 194 Bahrain 69, 76, 93–94, 107–8, 158
Amazon 5, 37, 39, 50, 65, 119, 181 Balance sheets 71, 159
American Bar Association (ABA) 165, 167 Banco Bilbao Vizcaya Argentaria (BBVA) 7
AML (anti-money laundering) 41, 58, 64, 127, Bank account 128, 182, 192
131, 174 Bank Indonesia 101
Amount 24–25, 27, 34, 54, 101, 114–16, 118, Bank Negara Malaysia (BNM) 33, 44, 96–97,
132, 140 186
–––total 25–27, 54 Bank Negara Malaysia BNM 88, 96, 107
Analytics 22, 24, 51, 56, 165, 184 Bank of England (BOE) 24, 72, 187
–––predictive 6, 65, 165–66 Bank services 144–45
Antimoney laundering 41, 127, 174 Banking 4–5, 7–8, 10, 13, 104–5, 154, 156,
APIs (application program interfaces) 114, 193–95, 198
194 –––conventional 72, 192
Apple 5, 37, 39, 50, 181 Banking industry 17, 26, 54, 130
Apple pay 22, 37–39 Banking sector 132, 176
Application program interfaces (APIs) 114, Banking services 7, 54, 58, 87, 189–90
194 Banks 37–38, 53–55, 95–97, 126–28,
131–32, 147–48, 155–57, 181–82, 193–97
DOI 10.1515/9781547400966-009
202 Index
–––challenger 54–55 –––decentralized 178
–––conventional 71, 93 Blockchain technology 32–33, 84–85,
–––correspondent 126–27 124–25, 131, 154–55, 161, 164, 169–71,
–––investment 119, 185 179
–––large 114, 172 Block-chain technology 2, 156, 170
–––traditional 22, 194–95 Blockchain technology
Barberis 16, 44–45, 185, 196–97 –––deployed 85
Beehive 75–77 –––implemented 170
Benefits 2–4, 57–58, 120, 142–43, 147–48, Blockchain technology-arsenal 198
154, 156, 177, 191 Blockchain technology-how-banks-building-
–––potential 156, 163, 179 real-time 66
BFB 93 Blockchain-based fintech solution 84
Big data 8–9, 22, 24, 56, 59–60, 67–68, 70, Blockchain-Based Islamic Capital
117, 185–87 Markets 154–55, 157, 159
Bitcoin 28, 33–35, 39–41, 113, 124–28, 134, Blockchain-based payment, new 161
137–38, 172–73, 179–80 Blockchain-based smart contracts 142, 147
Bitcoin blockchain technology 176 Blockchain-based technologies 160
BKM 101–2, 107–8 Blockchain-based technology, basic 141
Blockchain 8–10, 55–58, 66–70, 111–14, Blocks 55, 123–24, 126, 138, 149, 151, 153,
116–20, 122–34, 138–48, 150–64, 161
166–80 Bloomberg terminals 18
Block-chain 26, 32, 57–58, 124, 140, 154, Blossom 84–85, 108
156, 161–63, 169 Blossom finance 84, 88, 159
Blockchain BNM. See Bank Negara Malaysia
–––bitcoin 126, 199 Bodies 30, 163, 165
–––platform 172 BOE (Bank of England) 24, 72, 187
Blockchain application 133, 156, 179 Bonds 13, 29, 129, 158
Blockchain business case 152 Borrowers 52, 70, 76, 104
Blockchain community 138, 175 Boston consulting group 11, 130, 138, 164,
Blockchain companies 113–14 167–68
Blockchain cryptography works for smart Branches 64, 183, 189–90
contracts 141 Brands 5–6, 8, 38–39
Blockchain economy 177, 179 Brokers 17, 130
Blockchain ecosystem 131 Brunei 102–3
Blockchain fintech 176 Brunei Darussalam 69, 99, 102–3
Blockchain implementation 172, 178 BSAS (Bursa Suq Al Sila) 87
Blockchain industry 9, 176, 179 BTC 34, 44, 127–28, 157
Blockchain infrastructure 35, 133, 135, 137 Building 9, 58, 60, 90, 93–94, 118, 183, 189,
Blockchain ledgers 126, 130, 154 197
Blockchain models 171, 173 Building blocks 8, 93, 98, 123, 133–34, 136,
Blockchain platforms 163 138, 168
Blockchain protocol software system 126 Bursa Suq Al Sila (BSAS) 87
Blockchain protocols 154, 157 Business logic 135–36, 142
Blockchain revolution 156, 199 –––stateful 133, 136
Blockchain solutions 153, 172–73 Business models 4, 72, 80, 103, 119, 153,
Blockchain space 9, 113 177, 187, 193
Blockchain systems 134, 136, 152 –––innovative 6, 55, 69, 74, 96, 186
Index 203
–––new 95, 101, 105, 153 Cloud computing 9, 22, 49, 51, 58–59, 66,
Businesses 4–5, 14–16, 21–22, 78–79, 70, 115, 177
121–22, 167–68, 177–78, 182–83, Cloud service provider (CSPs) 58–59
187–88 Cloud services 59, 116, 184
Buyers 39, 87, 127, 130, 145, 147–48, 155, CMTP (Commodity Murabahah Trading
162 Platform) 76
Code 129, 135, 139–40, 142–43, 176
C Coin Gecko 32, 35, 45
CAGR 24–27, 38, 54, 59 Coins 28, 31–32, 35, 40–42
Calculation 73, 136 Collaboration 24, 57, 78, 88, 92–93, 122, 131,
Campaigns 53–54, 77, 81, 90 155, 188–93
Canadian Imperial Bank of Commerce Collaboration models for Islamic financial
(CIBC) 58, 113 institutions 189, 191, 193
Capabilities 9, 43, 74, 115, 173, 182–83, 195 Combinational 135
Capacity 130, 139, 182, 184 Committee on Payments and Market
Capital 53, 63, 80, 87, 103, 105, 142–43, 154, Infrastructures (CPMI) 30
158 Commodities 30, 42, 87, 157
–––working 148 Commodity Murabahah Trading Platform
Capital World 104 (CMTP) 76
Cases 9–10, 41–43, 73, 75, 114, 116–17, Community 78, 81, 83, 184
136–38, 156, 174–75 Companies 33–34, 42, 57–58, 105–6,
Cash 17, 39, 85, 88, 126, 145 114–15, 143–44, 164, 182–83, 187
–––digital 126 Compendious book 73
Catalyst 94, 117, 189–90 Competition 7, 67, 119, 136, 182, 189, 192
CBB (Central Bank of Bahrain) 93, 109, 158 Completion 73
CC (crypto-conditions) 135–36 Compliance 36, 69, 87, 116, 118, 142, 148,
CDD (customer due diligence) 131 154, 178
Central authorities 2, 31, 123–24, 161, –––regulatory 111, 139, 180, 186
172–74 Components 129, 139, 183–84
Central Bank of Bahrain. See CBB Computers 61, 64, 66, 123, 125, 129, 136, 142
Central banks 30, 32–33, 37, 101, 156, 186 Computing, decentralized 133–34
Century 15–17, 72–73 Concept 1–2, 4, 13, 28–30, 32, 60, 120, 123,
CFPs 53 157–58
Chain 113, 124, 126, 133, 154, 161 Conditions 69, 129, 140–41, 151
Challenges 9, 56, 106–7, 130, 144, 148, 173, Confidence 1, 3, 111, 121–22, 124, 154, 184
175, 181 Confirmation 147, 153
Challenges for Islamic financial Connect 17, 37, 57, 61, 90, 137–38, 157
institutions 185, 187 Connect networks 133, 137–38
Channels 5, 8, 37–38, 54, 92, 96, 182 Consortium 57, 86, 93
Chatbots 8, 165, 188 Consumers 10, 14, 17, 35, 37–39, 71, 164,
Choices 3, 54, 83, 117–19, 177 166, 183
CIBAFI (Council for Islamic Banks and Content 8, 160, 162, 164
Financial Institutions) 192 Contract management 165, 167
Claims 29, 57, 81, 85, 151–52, 154 Contract technology, smart 9, 139
Clients 62–63, 85, 87, 104, 126–27, 132, 137, Contracts 13, 39, 69, 128–29, 139–43,
152–53, 166 153–54, 165
Cloud 59, 115–16, 133, 166 Contractual agreements 65, 129, 139
204 Index
Cooperation 19, 29, 76, 102–3, 151, 156, 191 –––new 131

Coordination 93, 102, 127, 154, 171, 189–90 CVC (Corporate Venture Capital) 191
Corda 172, 174–75 Cyber extortion payments 44
Corporate Venture Capital (CVC) 191 Cyberattacks 36, 43–44, 130, 169
Costs 22, 49, 61, 63, 103–4, 144–45, 157–58, Cybersecurity 43–45, 47, 184–85, 195, 199
177–78, 191–92
Council for Islamic Banks and Financial D
Institutions (CIBAFI) 192 DAML (Digital Asset Modeling Language) 173
Counterparties 72, 104, 128, 140, 155 DARPA (Defense Advanced Research Projects
Countries 4–5, 32, 34–36, 91–92, 94–95, Agency) 64
98–99, 101, 103–4, 148–50 Data marketplace 135
Courts 142–43 Data matching 117, 145–46
CPMI (Committee on Payments and Market Databases 114, 124, 128, 133–35, 154, 179
Infrastructures) 30 Deal activity 25–26
Credit 1, 17, 21–22, 38, 60, 91, 116, 143 Debit cards 38–39, 104
Cross-border payments 18, 152, 157, 174, 180 Decentralization 106, 129, 169, 171, 179
Crowdfunding 14–15, 20, 23, 32–33, 49, Decisions 3, 49, 64–65
52–54, 72, 75, 79–80 Defense Advanced Research Projects Agency
Crowdfunding campaigns 33, 75, 90 (DARPA) 64
Crowdfunding including rewards 45, 66 Deferred payments basis 87–88
Crowdfunding market, global 53–54, 67 Delays 129, 131, 138–40, 144, 146
Crowdfunding platforms 35, 53, 66, 80, 82, Deloitte 27, 45, 58, 62, 66, 113
122 Development 24–25, 27, 69–70, 72–74, 80,
Crowdfunding segment 54 92–94, 96–98, 102–6, 146–48
Crypto assets 29, 32, 40–41, 43–44 Devices 8, 14, 37, 49, 60–61, 70, 115, 125, 153
Crypto-conditions (CC) 135–36 DFSA (Dubai Financial Services Authority) 76
Cryptocurrencies 28–33, 35–36, 39–42, DFSRG (Digital Financial Services Research
44–46, 124, 127, 153, 157, 159 Group) 92
–––categorization of 41–42 Digital asset 21, 42, 126, 128, 172–74
Cryptocurrencies and initial coin Digital asset holdings 58, 113, 172, 175
offerings 28–29, 31, 33, 35, 37, 39, 41 Digital Asset Modeling Language (DAML) 173
Crypto exchanges 35–36, 43–44 Digital channels 7, 22, 51, 55, 111, 185–87
Cryptography 28–29, 141, 155, 173 Digital currencies 15, 30, 41–42, 109, 126,
Crypto securities 29, 32, 41 178
Crypto tokens 29, 32, 41 Digital economy 111–12, 114, 116, 118, 120,
Crypto world 43–44 122, 124, 126, 128
CSPs (cloud service provider) 58–59 Digital ecosystem 183
CTF (counter-terrorism financing) 64 Digital Financial Services Research Group
Currency 20, 30, 32, 40–42, 125–27, 129, 170 (DFSRG) 92
–––virtual 30–31, 45, 172 Digital ledger technology. See DLT
Customer behavior 6–7, 181 Digital Malaysia 98
Customer centricity 181 Digital payments 15, 25, 37, 51, 68, 101,
Customer due diligence (CDD) 131 189–90
Customer experience 131, 181 Digital representations 30–31, 179
Customers 6–8, 17–19, 36–38, 54–58, Digital technologies 14, 16, 92, 111, 130, 152
131–32, 151, 156–57, 181–83, 186–87 Digital transformation 4–6, 10–11, 23, 192,
–––bank’s 194 195
Index 205
Digital transformation and development 4–5 –––medium-sized 7, 53, 75, 144

Digital transformation in financial services 11 Entities 35, 39, 152, 170, 182–83, 186
Digitalization 4–6, 16, 18, 49, 69, 91–92, 187 Entrepreneurs 45, 53–54, 78, 93, 166, 188,
Digitization 10, 37, 116, 160, 164, 181, 183, 197
187 Entry 49, 158, 164, 188
Disruptions 2, 4, 55, 71, 114, 149, 164, 173, Environment 3, 75, 93, 106, 175, 182–83
195 E-payments 37
Distributed infrastructure Equality 2, 139, 171
technology 169–70, 177 Equities 42, 142–44, 190
Distributed ledger technology 57, 113, 139, Era 10, 16, 20–22, 27, 114, 119, 181, 183, 187
160, 172 Errors 128–32, 139–40, 146, 152, 173
Distributed ledgers 29–30, 55, 58, 129, 140, ESMA (European Securities and Markets
142, 145–48, 157, 177–78 Authority) 30
Distribution 51, 54–55, 144, 161–62 Essence 71–72, 137–38
DLT (digital ledger technology) 158, 160, Estate, real 29, 41–42, 54
172–75 Ethereum 34, 43, 134, 136–38, 157, 167
DMCC (Dubai Multi Commodities Centre) 76 Ethis Crowd 78, 108
Documents 69, 128, 130, 132, 146, 151, ETHIXS 87
165–66, 170, 189 Eureeca 75, 79, 96
Dollars 23, 35, 43, 50, 54–55, 81, 85, 133, 144 Europe 13, 24, 27, 55, 79, 91, 104–5
Drive growth of Islamic FinTech 109 European fintech market 24
DRM (digital rights management) 160 European Securities and Markets Authority
Dubai 46, 75–76, 79, 103 (ESMA) 30
Dubai Financial Services Authority (DFSA) 76 Events 43, 145, 147–48, 153, 161, 186, 190
Dubai Multi Commodities Centre (DMCC) 76 Evolution 13, 15, 17, 19, 37, 44–45, 166–67,
169–70, 174–76
E Evolution of legal services 164–65, 167
Earth 2–3, 17, 123 E-wallets 21, 37–40, 98, 179
EBA (European Banking Authority) 30 –––adoption of 39–40
ECB (European Central Bank) 30 Exchanges 30, 35–36, 41, 44, 121–22,
Economic transactions 121, 123, 147, 179 126–28, 137, 169, 171–73
Economic value 28, 120–21 –––decentralized 36, 125
Economy 18, 28, 58–59, 94, 98, 121, 123, –––medium of 29, 31
164, 169–71 Execution 55, 76, 139, 141–42, 145, 173
Ecosystem 56, 90, 98, 119, 176, 183–84, 186, Expanded use cases of blockchain 139–40,
189, 193 142, 144, 146, 148, 150, 152, 154, 156
–––financial 177, 195 Experimentation 138, 173, 187
EIFB (Emirates Islamic Financial Exploring Islamic FinTech seminar 103
Brokerage) 76 Explosion 76, 111, 117
Emergence 9, 16, 19, 21–22, 28, 32, 37, 49,
54 F
Emergence of Islamic Fintech 69–70, 72, 74, Failure 106, 141, 161, 187
76, 78, 80, 82, 84, 86 Family 150
Emirates Islamic Financial Brokerage FATF (Financial Action Task Force) 31
(EIFB) 76 Fiat currency 30, 35, 157
Enablers 9, 147, 163 File systems 133, 135
Enterprises 23, 53, 59, 135, 167, 182, 187, 190 Files 44, 46, 108, 133–34
206 Index
Finance 6, 17, 19, 45, 49, 70–71, 105–6, FINRA (Financial Industry Regulatory
185–88, 198–99 Authority) 63
Finance industry 37, 160, 188, 198 Fintech 8–10, 13–28, 44–47, 56–70, 91–93,
Financial Action Task Force (FATF) 31 95–96, 105–8, 185–86, 196–99
Financial crisis 16, 19, 21–22, 27, 105, 184 –––conventional 70, 73, 188
Financial inclusion 13, 49, 69–71, 91, 101, Fintech accelerators 22
189–90, 192, 198 Fintech adoption 69, 95
Financial industry 2, 4–6, 9, 13, 16, 92, 95, FinTech book 45, 197
114, 119 Fintech companies 20, 22, 24, 26–27, 55, 57,
Financial Industry Regulatory Authority 101–2, 156, 190–92
(FINRA) 63 –––new 20, 27
Financial innovation 21, 49–51, 53, 55–57, Fintech developments 22, 103
199 Fintech ecosystem 70, 99, 105, 188
Financial institutions 5–7, 13–14, 20, 72, –––designed 14
87–88, 93, 115–20, 187–88, 194 –––robust 92–93
–––international 104–5 –––sustain Bahrain’s 94
–––regulatory 26–27 –––vibrant 94–95
Financial instruments 1, 60, 87, 118, 129 Fintech evolution 16
Financial products 5, 7, 13, 69, 85, 87 FinTech firms 23, 109, 199
Financial products and services 13, 16, 19, Fintech funding 25–26
21, 49, 57, 70, 194 FinTech futures 94–95, 108
Financial regulators 20–21 Fintech hub 26–27, 93, 95
Financial services 10–11, 13, 16–17, 20–22, Fintech industry 51, 97, 184–85, 188
38–39, 72, 138–39, 169–70, 192–94 Fintech innovations 18, 199
–––primary 189–90 Fintech innovators 27
Financial services industry 5–6, 16, 21–22, Fintech investment in Asia-Pacific 25
49, 51, 57, 59–60, 69, 188 Fintech investments 13, 23, 25–27, 93, 101,
Financial services industry 111
perspective 49–51, 53, 55 Fintech investments in Turkey 102
Financial services institutions 59, 199 FinTech Istanbul 102, 108
Financial services investors 113 FinTech Istanbul & BKM 102
Financial services providers 18–19, 21, 49, FinTech Malaysia 96, 108
88 Fintech market 24–27, 99, 102
Financial Services Regulatory Authority Fintech participants 103–4
(FSRA) 103, 107 Fintech platforms 6–7, 14, 73, 94, 186
Financial services sector 93, 96, 103, 114 –––conventional 106
Financial services technology consortium 14 –––new Islamic 74
Financial system 3, 122 FinTech platforms add Islamic finance
Financial technology 13, 45, 73, 96, 108, 111, capabilities 109
175, 196, 198 Fintech products 13, 70
Financial technology handbook 45, 197 Fintech revolution 50, 56, 69, 73, 96, 199
Financial transactions 8, 17, 20, 123, 129, Fintech sector 51, 84, 95, 99, 101, 182
155, 186–87 Fintech segments 102, 111
Financing 70, 72, 79, 84, 86, 111, 113, 116, Fintech startups 7, 24, 45, 93, 105
144–47 Fintech start-ups 22, 38, 58, 102, 189,
Finextra 93, 108, 190–91, 197 192–93
FinTech Switzerland 20, 45
Index 207
Fintech transaction value 51 H

FinTech trends 45, 197 Hackathons 190–91
Fintech vendor 13, 190 High-performance compute (HPC) 135–36
Firms 17, 20, 23, 55, 58, 62, 106, 113, 155 History 13–14, 16, 18, 20, 22, 24, 26, 28,
Focus 26, 79, 84, 90, 137–38, 143, 146, 173, 72–73
176–77 HPC (high-performance compute) 135–36
Forbes rankings 5 Human advisors 22, 63
Foreign banks 1, 104 Human beings 2–3, 66, 123
Foundation 9, 17, 37, 92, 124, 139, 158 Humans 64, 169
Framework 82, 96, 103, 108, 119
Fraud 2–3, 59–60, 129–31, 134, 139, 144, I
146–47, 152, 154 IAP (Investment Account Platform) 86
Frontier, next 66–67 IAS (International Accounting Standards) 87
FSRA (Financial Services Regulatory IBM (International Business Machines) 17,
Authority) 103, 107 175
Functions 31, 35, 38, 41, 118–19, 135, 147, ICOs (initial coin offerings) 28–29, 31–35, 37,
154, 195 39, 41–42, 106
Funding 26, 33, 53, 55, 72, 77, 81, 144, 148 ICTs (information communication
Funds 33–35, 53, 75–76, 78, 81, 86, 93, 95, technologies) 5, 93–94, 98
146–48 IDC (International Data Corp) 58–59, 66–67,
–––public-private fintech investment 105 185
–––raising 33–35 IETF (Internet Engineering Task Force) 135
IFIs (Islamic financial institutions) 71, 85,
G 87–88, 106, 158, 181–94, 196, 198
GCC (Gulf Cooperation Council) 9–10, 88, IFIs and Islamic fintech platforms 191
93, 149 IFN (Islamic Finance News) 87
GDP (gross domestic product) 5, 10, 91, IFSB (Islamic Financial Services Board) 149,
93–94 168, 186, 195
Gen.lib.rus.ec/book/index 198–99 IFSD (International Financial Services
Global landscape 13–14, 16, 18, 20, 22–28, District) 197
30, 32, 34, 73–74 IFSI (Islamic Financial Services Industry) 86,
Globe 17, 19, 35, 37, 39, 74–75, 77, 89–90, 149
189–90 ILP 135, 138
Gold 29–30, 41–42, 157 IMF (International Monetary Fund) 10, 29–30
Gold label fintech products 14 Impediments for Islamic Fintech 106–7, 109
Goods 17, 29, 39, 41, 61, 145–47, 151, 170 Implementation 28, 71, 85, 98, 117–18, 134,
Google 5, 21, 37, 50, 65, 114, 181 173–74, 181
Governments 1, 4, 37, 92, 98, 103, 105, 176, Importance of Fintech 49–50, 52, 54, 56, 58,
189–90 60, 62, 64, 66
Gross domestic product. See GDP IMS (Innovation Market Solutions) 18
Groups 11, 13, 96, 126, 143, 190 India 26, 39–40, 104, 111
Growth 5, 21, 24, 26–27, 101, 104, 111, Individuals 21, 52–53, 72, 84, 121, 124, 140,
149–50, 185–87 179, 193
Growth rate 61, 149 Indonesian Fintech investments 99
Gulf Cooperation Council. See GCC Industrial revolution 15–16, 27
Industries 2, 4–8, 14, 49–50, 54, 70–71,
106–7, 164, 186–89
208 Index
Industry participants 14, 155, 177 International supplier payments 127

Inequality 122 International turnkey solutions 87
Information 18, 20, 62, 65, 124–25, 130, 144, Internet 7–9, 37, 49, 54, 60–61, 114–15, 135,
152, 169–70 153, 179–80
Information communication technologies. Internet Engineering Task Force (IETF) 135
See ICTs Internet of things. See IoT
Information technology 13, 15, 58, 174, 188, Interoperability 92–93, 101–2, 129, 139, 177,
199 189–90
Information technology MOIT 92, 109 Investment Account Platform (IAP) 86
Information Technology University (ITU) 92 Investment management 20, 58, 62, 85
Infrastructure 14, 23, 58–59, 115, 121 Investments 1, 15, 23–26, 70–72, 94–95,
–––blockchain-based payments 152 105, 111, 113–14, 175
Initial coin offerings. See ICOs –––first 84, 191
Initial coin offerings 28–29, 31–33, 35, 37, Investors 24–26, 43, 45, 75, 77–80, 82,
39, 41, 106 85–86, 99–100, 153
Initiatives 26, 35, 87, 90–91, 93, 95, 104, Invoices, international supplier 127
186, 193 IoT (internet of things) 8–9, 14, 49, 60–61,
Innovation 3, 5, 22, 73, 105–6, 123–24, 70, 114–15, 135, 169–70, 180
186–87, 189–90, 192–93 IP. See intellectual property
–––open 193, 197 IPFS 135–36, 138
Innovation ecology 183 Iran 149–50, 198
Innovation Market Solutions (IMS) 18 Irst-FinTech-consortium-islamic-banks 108
Innovational funding 53 Islam 3, 72, 103, 107, 123
Innovative products 105, 183, 191–92 Islamic banking 45, 70, 72, 87, 94, 192,
Instant payment infrastructures 147–48 198–99
Institutional investors 86, 118–19, 158 Islamic banking and finance 70–71, 187
Institutions 69–70, 72, 84, 115, 117–18, 120, Islamic banks 71–72, 86–88, 93, 108, 154,
130, 132, 174 183, 192–93, 195
–––microfinance 84–85 Islamic banks and financial institutions 194
Insurance companies 56, 185 Islamic capital markets 10, 158–59
Insurance market, global 149 Islamic countries’ initiatives for Islamic
Insurance sector 26, 149 Fintech 90–91, 93, 95, 97, 99, 101, 103,
Insurers 56–57, 132, 144, 151–54, 192 105
InsurTech 15, 23, 56–57, 67, 198 Islamic crowdfunding 69, 75, 79, 89
Integration 69, 115, 146, 174 Islamic digital ecosystem 184
Intellectual property (IP) 10, 61, 160–61, 163, Islamic economies 9, 71, 142, 148, 196
165 Islamic finance 70–72, 84, 86, 103, 105–7,
Interfaces, application programming 114 186, 188, 196, 198–99
Intermediaries 30, 55, 125, 130, 142, 154, 157, Islamic finance industry 9, 32, 71, 73, 76, 87,
163, 177 103, 105–6, 181
International Accounting Standards (IAS) 87 Islamic Finance News (IFN) 87
International Business Machines (IBM) 17, Islamic financial hubs 90
175 Islamic financial industry 187–88, 192
International Data Corp. See IDC Islamic financial institutions 71, 76, 85, 88,
International Financial Services District 106, 181–82, 184–94, 196, 198
(IFSD) 197 Islamic financial services 70, 96
International Monetary Fund (IMF) 10, 29–30 Islamic Financial Services Board. See IFSB
Index 209
Islamic Financial Services Industry (IFSI) 86, Launch Good 81

149 Law 4, 36, 145, 164, 167–68, 185
Islamic financial technologies 90, 103 Learning 64–65, 72, 195
Islamic Fintech 69–72, 74–76, 78, 80, 82, Ledgers 2, 126–27, 143, 153, 156, 169–70
84, 86, 88–109, 191–92 –––public 57, 123, 126, 140, 151
Islamic Fintech alliance 88–89 Legal business model 166–67
Islamic FinTech alliance launched 107 Legal prose 142
Islamic fintech companies 72, 183 Legal services 164–67
Islamic Fintech developments 74–75, 77, 79, Legal technology 167–68
81, 83, 85, 87, 89 LegalTech 164–65, 167
Islamic fintech ecosystems 94, 186 Lending 7, 9, 15, 20, 23, 27, 52–53, 101, 108
Islamic fintech fraternity 9 License 38, 79, 95
Islamic fintech industry 106, 183, 185–86, Limitations 38, 43, 170, 176–77, 179, 192–93
193 List of Indonesian Fintech investments 99
Islamic Fintech landscape 73–74 Loans 53, 75–76, 78, 84, 104, 128, 143–44,
Islamic FinTech landscape red money 74 158
Islamic fintech platforms 70, 74–75, 106, Local currency 85, 127, 159
183, 191 Logic 135–36
Islamic fintech players 73 London 17, 22, 46, 79, 91, 104–5, 107, 198
Islamic insurance 149, 151, 153 Long-Term Capital Management. See LTCM
Islamic trade financing 144–45, 147 LTCM (Long-Term Capital Management) 19
Islamic transactions 139, 141, 143
Islamic world 32, 73, 107 M
ITU (Information Technology University) 92 Machine learning 8, 14, 64, 136, 165–66,
189, 195
J Machines 64, 136, 170, 172, 189
Jurisdictions 19–20, 26, 31, 55, 86, 147, 150, Malaysia 69, 79, 86, 88, 90, 95–98, 149–50,
159, 170 160, 186–87
Management 55, 59, 104, 152, 165, 182,
K 186–87, 197
Kapital Boost 78–80, 88 –––wealth 8, 23, 26–27, 67
Kenya 27, 127 Market participants 119, 155–56, 160, 163
Key 56, 91, 106, 115–17, 141, 149, 155, 165, Markets 18–20, 28–29, 38–39, 45–46,
177 53–54, 67, 105–6, 118–19, 181–83
–––private 36, 126, 141 –––capital 58, 143, 155, 172, 181, 188
Khalifah 2–3, 123 –––emerging 91, 149
Kickstarter 53–54, 68 McConaghy 136–37
Kingdom 93–95 MDeC (Multimedia Development
Know-your-client. See KYC Corporation) 98
KPMG 15, 24–26, 46, 62, 67, 105, 108, 176, Media Rights 10, 160–61, 163
192 Mega 25–26
KYC (know-your-client) 58, 131–32, 153 Merchants 17, 22, 37–39
KYC information, customer’s 132 Micropayments 160, 162
–––blockchain-enabled 162
L Middle East (MEA) 27, 45, 78–79, 82, 88, 93,
Lack 20, 25, 39–40, 44, 77, 79, 146, 187 107, 111, 158
Lahore, first FinTech Center in 92, 107 Migration 116, 144
210 Index
Miners 125–26, 172 Opaqueness of blockchain platforms and

Mobile 7, 46, 70, 115, 133, 152, 195 standards 163
Mobile subscriptions 61, 94 Open API 114
Models 59, 61, 65, 72, 169, 171, 177, 190–91, Organization of Islamic Countries (OIC) 32
193–95 Organizations 5–6, 52–53, 60, 131–32, 171,
–––hybrid 191 177, 182–84, 186–87, 193
Modified 16, 29, 31–34, 36, 39–40, 52, 77, OTC market space 160
80, 90
Money 19–20, 84–85, 120–21, 125, 127, 129, P
131, 145, 148 Pakistan 79, 91–93, 108, 150, 199
Money transfers 7, 20, 51, 125, 156, 192 Pakistan and fintech and blockchain 92
M-PESA 27, 39, 127 Pakistan Telecommunication Authority
MSC Malaysia 98 (PTA) 91, 109
MSMEs 7–8, 80, 144, 158 Parameters 142–43
Multimedia Development Corporation Participants 42, 103, 116–17, 119, 148, 161,
(MDeC) 98 171
Muslim community 3, 81, 90 Parties 126–27, 141, 145–46, 152, 155, 163,
Muslims 3, 72–73, 84–85, 139 171–72, 175, 177–78
My Private Banking 62, 67 Partners 90, 99, 131, 164, 177, 183, 185, 187,
195
N Partnerships 58, 84, 94–95, 97, 103, 194–95,
Narwi 82 199
Nasdaq 18, 131 Path 73, 115, 167, 186, 193
Nasdaq Dubai Murabahah platform 76 Payment credentials 38
National Institute of Standards and Payment infrastructure 37
Technology (NIST) 59 Payment instruments 38–39
Neo-banking 54, 71 Payment methods 37–39
Neo-banks 54–55 Payment platforms 37, 119
Network 79, 125, 132, 134, 137–38, 151, 161, Payment service providers (PSPs) 37
172–73, 177–78 Payment transactions 161, 163
–––connecting 137–38 Payments 20, 33, 37–39, 49–51, 126–27,
Neural networks 65 129–30, 143–47, 156–58, 194–96
New entrants 16, 20, 27, 37, 50, 93, 101, 103, –––mobile 15, 37, 51, 194
105 Payments industry 37, 50–51, 57–58, 157
NIST (National Institute of Standards and Payments sector 25, 27, 97
Technology) 59 Payments systems 131, 156, 171
Nodes 2, 44, 125, 172–73 PayPal 20, 22, 37, 39, 50, 126
Noncash transactions 51 PBFT (Practical Byzantine Fault Tolerance) 173
North America 4, 25–26, 40 Peyton 93, 95, 109
Number 4–5, 24–26, 28–29, 34–35, 53–54, PIF (Public Investment Fund) 95
61–62, 113, 187–88, 190–91 Platforms 57, 59, 69, 75–89, 93, 115–18,
172–73, 175, 194
O –––blockchain-based 177
Objects 61 –––mobile 115
Obsolete 163, 188 –––online fintech 88
OIC (Organization of Islamic Countries) 32 –––shared 132, 189–90
Online platforms 63, 76, 87 Population 5, 39, 53, 69, 91, 94, 99, 101
Index 211
Potential users 24–25, 28, 115, 120 Regulatory authorities 4, 36, 43, 96, 101, 186
Practical Byzantine Fault Tolerance Regulatory sand-boxes 175–76, 183
(PBFT) 173 Reinsurers 144, 152, 154
Predictions 65 Research 17, 38, 45–46, 53–54, 58–59, 62,
Prices 20, 41, 43, 49, 76, 116, 140–41 67, 94, 188
Processing 56, 64, 72, 75, 119, 133, 135–37, Resources 9, 17, 106, 119, 121–23, 144, 146,
166, 176 183, 185
Productivity 2, 5–6, 67, 130, 139 Respondents 55, 191–92
Products 7–8, 13–14, 16–17, 70–71, 116, 154, Response of Islamic financial
169–70, 190, 194–95 institutions 181–82, 184, 186, 188, 190,
–––new 105–6, 144, 148, 183 192, 194, 196, 198
Programmers 133, 137, 188, 190 Retail 6, 8, 51, 60, 79, 181
Progressive Importance of Cyber Security 43, Retrieved 10–11, 44–47, 66–68, 107–9,
45, 47 196–99
Projects 33–35, 53–54, 72, 77, 81, 84, Revenues 14, 52–53, 117, 160–61, 163
113–14, 157–58, 173–74 Revolution, technological 69, 73, 193
Property, intellectual 10, 160–61, 163 Rewards 33, 80–81, 191
Providers, global blockchain payments Ripple 95, 113, 125, 135–36, 148, 156–57
solution 95 Ripple’s blockchain banks 157
PSPs (payment service providers) 37 Risks 1, 70–71, 121–22, 124, 131–32, 142–43,
PTA (Pakistan Telecommunication 145–46, 152, 154
Authority) 91, 109 –––reputational 60, 195
Public blockchain 128, 171, 174 Robo-advisors 22, 62–63, 66–67, 85, 188,
Public Investment Fund (PIF) 95 199
Pulse 46, 108 Royalty payments 162, 164
Purchase 8, 38–39, 151 Rules 70–71, 76, 174, 185–86
PwC 7, 11, 34, 55–56, 182, 185, 191–92,
198–99 S
Sales 39, 145, 149, 158, 187
Q SAMA (Saudi Arabian Monetary
Qatar 82, 150 Agency) 94–95
Quality 22, 45, 96, 107, 117, 160, 189 Samsung pay 22, 37–39
Quarter 25–26, 35, 52, 105 Sandbox 175
Saudi Arabia 94, 149–50
R Saudi Arabian Monetary Agency
Real estate projects 78 (SAMA) 94–95
Reciprocity 121–23 Scalability 10, 64, 139, 148, 173, 175,
Region 24–27, 84, 90, 93, 99, 149, 186, 182–83, 197
189–90, 192 Scholars 41, 72, 107, 193
Register 63, 128–29 SEB 64
RegLab 103 Sectors 14–15, 27, 53, 55, 60, 70, 72, 94, 106
Regtech 26, 185, 196 –––financial 8, 70, 76, 123, 197
Regulations 35, 41, 43, 46, 58, 63, 116, 118, –––private 94, 189–90
185–86 –––takaful 149–50
–––new 35, 101, 105, 116, 118 Securities 35, 37–38, 130, 139, 141–42,
Regulators 105, 118, 130–31, 140, 155–56, 144–45, 155–56, 181, 184
172, 174–75, 178, 183–86 Securities commission Malaysia 79, 96
212 Index
Securities Investor Protection Corporation Software 38, 59, 64, 143, 164–65, 177, 197
(SIPC) 63 Solutions 114, 117, 137, 145–46, 171–75,
Securities transactions, clearing and 177–78, 183, 188–90, 199
settlement of 130 Source 15–16, 29, 31–34, 39–40, 52, 77–78,
Security token 29, 43 80–81, 89–90, 112
Segments 23, 25, 51, 53, 56, 69, 73, 107, 112 Southeast Asia 78–79, 102, 158, 192
Sellers 61, 87, 127, 130, 145, 147–48, 155, 162 Space 24, 93, 115–16
Service Oriented Architecture10 (SOA) 87 Spending 14, 58–59
Services 7, 19–21, 41, 49–50, 56–59, 61–63, SQL 133–34
70–71, 143–45, 194–95 SRB (Shariyah Review Bureau) 158
–––cloud computing 58 Standards 87, 98, 161, 163–64
–––consumer-ready blockchain 113 Startup stage announcement value 99–100
–––customer 64, 66 Start-ups 13, 16, 20–21, 23, 76, 78, 96, 111,
–––customer-centric 7, 13 113
–––retail customer 59–60 State 35–36, 50, 122, 125, 133, 135–38, 140,
Settlement 87, 129–31, 139, 143, 145, 156, 143, 149
178 Stateless 135
SFC (Singapore FinTech Consortium) 94 Statista 15, 24–27, 46, 50–52, 54, 68
Shariah 41, 43, 70–71, 76, 79, 103, 106, 129, Statue 75
192 Stefik 183, 199
Shariah compliance 85, 88, 106 Stellar 136, 148, 158
Shariah-compliant 70, 74, 78–79, 84–85 Storage 42, 58, 133–34, 176
Shariah-compliant products 84, 87 STP (Straight-through processing) 87
Sharing 27, 70–71, 120, 152, 158, 161–62, Straight-through processing (STP) 87
167, 178, 186 Students 7, 78–79, 83
Sharing economy 9, 28, 56, 114, 120–23, 151 Subsets 30–31, 135, 155–56
–––new 22, 120–21, 123 Success 8, 53, 81, 83, 117, 120, 174, 177–78,
Sharing model 71, 84 182
Shariyah Review Bureau (SRB) 158 Success rates 53–54
Shekra 82–83 Sukuk 143, 158–59
Singapore 22, 24, 26, 34, 78, 80, 102, 174, Supply chain 72, 145, 147–48, 154
198 Survey 7, 62, 66, 164, 191–92, 199
Singapore FinTech Consortium (SFC) 94 Swan 169, 174, 177, 180
SIPC (Securities Investor Protection SWIFT 18, 127, 132, 136, 156
Corporation) 63 Systems 2–3, 114–15, 118–20, 122–23,
Skills 21, 27, 103, 188 125–28, 134–36, 138, 142–43, 177–78
Skolafund 83 –––open 114
Smart contract applications 140, 143, 148
Smart contracts 129, 135–36, 138–44, T
147–48, 151, 153, 157, 159, 173–74 Table 5, 15–16, 28–31, 34, 36, 38–40, 52–54,
Smart Contracts in Islamic Transactions 139, 99–100, 161–62
141, 143 Tablets 7, 61
Smart Contracts on Blockchain 140 TAM (total addressable market) 167
Smartphones 7, 24, 37, 49, 105 TCP/IP 137
SMEs 53, 75, 79–80, 144 Technological Perspective 49, 57, 59, 61, 63,
SOA (Service Oriented Architecture10) 87 65, 67
Social networks 24, 172 Technologies fintech companies 14
Index 213
Technology 2–3, 5–7, 15–19, 49, 73–75, Turkey 87, 101–2, 150

115–19, 123–24, 164–66, 173–80 Turkish Fintech ecosystem 102, 108
–––emerging 172–73, 184 Turkish government 102
–––new 14, 17, 74, 103, 106, 173, 175, 188–89, Types 13–14, 18, 21, 24, 29, 32, 39–40, 42,
195 130–31
–––revolutionary 58, 70
Technology companies 169, 183 U
Test 69, 96, 101, 103, 175, 183, 186, 190 UAE 27, 46, 69, 75–76, 104, 150
Third parties 87, 137, 144, 152–53, 179, UK 20, 24, 34, 55, 104–5, 111, 175
193–94 United States 18–21, 24–25, 27, 34–36, 39,
Threat 56, 154, 156, 163, 191 63, 101, 111, 166–67
Token storage 133–34 University 44, 47, 92, 102, 188
Tokens 28–29, 31, 33, 40–43, 125, 134–35, US FinTech market size 46
137, 157, 169 Usage 16, 41, 43, 115–16, 119, 160, 162–63,
–––digital 138, 154 170, 178
Total addressable market (TAM) 167 Users 56, 78–79, 118–20, 124, 126, 162–63,
Traction 24, 75, 149–50, 194 183, 185, 187
Trade 51, 63, 71, 116, 127, 130–31, 139, UX 119–20
143–45, 147
–––international 144–46 V
Trade cryptocurrencies 35 Value 5, 30–31, 43–44, 46, 124–26, 133–34,
Trade finance 58, 87, 143, 145–48, 170 137–38, 154–55, 183–84
–––blockchain-based 145, 148 Value blockchain transactions, high 179
Trade transactions 145–46, 148, 155, 177 Value chain 7, 50, 145, 148, 176
Trademark Protection 10, 160–61, 163 VC-backed fintech companies in Asia 26
Traders 18, 120 Vendors 53, 59, 115, 117, 119–20
Trading 14, 36, 116, 142, 145, 160 Verification 2, 117, 130, 132, 153
–––open account 144–46 Visibility, real-time 145, 147
Trading platform 154–55
Trading securities 58, 119, 142, 180 W, X, Y, Z
Transaction confidentiality, maintaining 160 Wahed Invest 85–86
Transaction costs 96, 121 Wallets 35, 38, 92
Transaction data 172–73 Waqf World 89–90
Transaction value 24–27, 51, 54 Waqfworld.org 90
Transactions 2, 116–17, 123–28, 130, 141, Workflow 118, 143, 156
157, 160–61, 172–73, 176–77 World 2–3, 18–20, 60–61, 72–73, 78–79,
Transfers 14, 17–18, 20, 85, 129, 142, 85–86, 89–91, 102, 104–5
145–46, 156 World Bank 10, 29–31
Transformation 5, 66, 71, 115, 151, 199 World Trade Organization (WTO) 170
Transnational 10, 170–71 Worldpay 40, 47
Transnational organizations 170–71 Worldwide big data technology and services
Transparency 1–2, 69, 72, 114–16, 146–48, forecast 66
152, 154–55, 160, 170–71 WTO (World Trade Organization) 170
Trust 1, 3, 28, 30, 120–24, 126, 128, 142, 161 www.statista.com 46, 68
–––extending 122
–––public 1

Hazik Mohamed, Hassnian Ali - Blockchain, Fintech, and Islamic Finance. Building The Future in The New Islamic Digital Economy (2019, de Gruyter)

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Hazik Mohamed, Hassnian Ali - Blockchain, Fintech, and Islamic Finance. Building The Future in The New Islamic Digital Economy (2019, de Gruyter)

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Hazik Mohamed and Hassnian Ali

Blockchain, Fintech, and Islamic Finance

Building the Future in the

Library of Congress Control Number: 2018962039

Bibliographic information published by the Deutsche Nationalbibliothek

© 2019 Hazik Mohamed and Hassnian Ali

This is an important contribution by the authors to two emerging fields—

Five Stars as a Rule

Chapter 2: Fintech—Definition, History, and Global Landscape  13

Chapter 3: Importance of Fintech and Its Applications  49

Chapter 4: Emergence of Islamic Fintech and its Developments  69

Chapter 5: Blockchain and the Digital Economy  111

Chapter 6: Expanded Use Cases of Blockchain  139

Chapter 7: Evolution of Blockchain  169

Chapter 8: Response of Islamic Financial Institutions  181

DOI 10.1515/ 9781547400966-208

The Rationale for Financial Disruption

Ethics and Technology

Digital Transformation and Development

of information communication technologies (ICTs) by the large number of popu-

Table 1.1: Forbes Ranking (2018), Top 100 Brands

Rank Brand Brand Value (US$B) 1-Year Change

1 Apple $182.80 +8%

Figure 1.1: Forbes (2018) 100 Most Valuable Brands List

Shifts in Customer Behavior

financial services: corporate and investment banking, insurance, MSMEs, retail,

Changes in Engagement and Purchasing Behaviors

Fintech has also introduced a different way to speak to customers—to understand

Structure of the Book

In the past, fintech was dismissed by traditional financial industry professionals

Definition and Concept of Fintech

Fintech in the etymological and general perspective is the portmanteau of finan-

Jan 1, DEC 1, Nov 1, OCT 1,

Table 2.1: Investment by Sectors (2017)

Sector Investment (Year 2017)

Mobile Payments US$450 billion

Source: Compiled from KPMG, 2018 and Statista, 2018

Table 2.2: Stages of Industrial Revolution

First Stage Second Stage Third Stage Fourth Stage

1780s–end of 1870–start of 1960–1970 1970–present

Start from mechanics, Introduction of The usage of Introduction of cyber

Source: Modified from Henning (2013).

Table 2.3: Summary of Fintech Evolution

Date 1866–1987 1987–2008 2009–present

Era Fintech 1.0 Fintech 2.0 Fintech 3.0 Fintech 3.5

Geography Global/developed Global Developed Emerging/developing

Key Elements Infrastructure Banks Start-ups/New entrants/innovators

Source: Modified from Arner, Barberis, & Buckley (2015).

Fintech 1.0 (1866–1987)

Fintech 2.0 (1987–2008)

Global Landscape of Fintech

From payments to wealth management, from P2P lending to crowdfunding, a new

Fintech in Major Regions

Cryptocurrencies and Initial Coin Offerings

Table 2.4: Number of Cryptocurrencies Available Since June 2013

Jun 02, 2013 14 Jun 05, 2016 593 (+2%)

It is very important to distinguish between cryptocurrencies and “tokens” and

Table 2.5: Definitions of Cryptocurrencies

The Committee on Payments They mentioned cryptocurrencies as digital currencies or

World Bank WB classified cryptocurrencies as a subset of digital curren-

Table 2.5. (continued)

Financial Action Task Force Has approached cryptocurrencies as “a subset of virtual

Source: Modified from (Houben & Snyers, 2018).